Written by Sumedha Shukla and Gaurav Arora
The COVID-19 crisis and subsequent lockdown measures have adversely affected all forms of economic activity, including India’s agricultural sector. The timing of these lockdowns coincided with the cropping cycles, particularly affecting the harvesting cycle of the Rabi crop. This exposed the sector to a series of production and price shocks. Compounded with the pre-existing infrastructure gaps, it worsened the impact.
The labour shortage led to delays in harvesting activity, which consequently delayed the arrival of produce in mandis. In the major wheat producing states like Uttar Pradesh, Madhya Pradesh and Punjab, the supply of wheat dropped by an average 23 per cent in March 2020 and by 42 per cent in April 2020 relative to the previous cropping season. The government did attempt aggressive procurement of this non-perishable grain, but the implementation was adjudged ineffective in most states. The situation was worse in the case of perishable food items such as vegetables, fruits, milk and poultry. Their supply was hit by the lack of infrastructure like warehousing facilities. Potato supply fell by almost 60 per cent compared to the previous season in Uttar Pradesh and West Bengal, and that for oilseeds like mustard fell by roughly 52 per cent in Rajasthan and Madhya Pradesh. The closure of sweet shops, teashops, restaurants and small eateries combined with high unemployment and reduced incomes ultimately led to the sudden drop in demand for these commodities. The milk demand, for example, declined by roughly 20-25 per cent during the March-May period.
The second major impact of the abrupt lockdown was that it disrupted the agricultural supply chains and marketing infrastructure. Even farmers who harvested their produce in time faced difficulty in accessing the transportation services to wholesale markets, which were anyways operating at reduced capacity due to social distancing norms. According the Vegetable Growers Association of India (VGAI), almost 30 per cent of the harvest-ready Rabi crop was left standing on the fields due to transportation related challenges and weak demand. Moreover, the produce that made it to the markets, specifically fruits like grapes and pomegranate, was sold at 15-20 per cent lower than their usual prices. Delays in Rabi harvesting resulted in fodder supply shortages, thereby causing inconvenience to the livestock owners in the dairy sector.
The COVID-19 crisis has also adversely impacted the sowing cycle of the upcoming Kharif crop by disrupting the supply of critical inputs like fertilisers and pesticides leading to higher input prices. This forced several farmers to sell their Rabi produce at lower prices for generating liquidity to be able to purchase inputs for Kharif plantation. So, despite a bountiful crop, the Indian farmer saw stressed or declining incomes, a story that became synonymous with Indian agriculture even before this pandemic.
In recognition of the damage caused to farmers due to the imposition of strict lockdown measures, the central government announced a composite relief package in May 2020 that included enhanced credit availability to provide emergency working capital to farmers. As a long-term measure the government proposed to invest in agricultural infrastructure with an aim to improve price realisation over time. All the short-term measures are mainly centred around higher credit availability through extended interest subvention (that is, subsidy on the interest rate) on farm loans along with a three-month loan-moratorium. The government also increased refinancing support to regional rural banks and regional cooperative banks to enhance credit supply during the pandemic. Furthermore, the government allocated additional credit support through Kisan Credit Cards (KCCs).
However, a policy-level reliance on credit-based relief relies heavily on existing institutional mechanisms that are inefficient and would limit credit accessibility to only a select strata of India’s rural society, potentially leading to higher inequality and higher incidence of poverty. Therefore, alternative policy instruments such as direct benefit transfers should supplement the credit-linked relief measures to circumvent the ongoing COVID-19 crisis.
It is well-established that rural credit has the potential to augment farm incomes and farmer welfare in the short-run and in the long-run. While short-term loans generally facilitate timely purchase of farm inputs (for example, fertilisers) that enable higher crop yields, medium-term and long-term credit can facilitate the creation of farm assets by funding infrastructural investments. In fact, some of the earliest policy responses to different kinds of production shocks (instances of low output) were credit-centric, as evinced by the distribution of government subsidised credit during drought years in the 1870s and the sanction of interest waivers on tagai/taccavi loans distributed for the purposes of input purchase and land management throughout 1950s and 60s.
In 1951, the establishment of the All-India Rural Credit Survey Committee laid the foundation of the institutional framework for a sound credit delivery system to finance agriculture and allied activities. But, until 1970, institutional credit percentage was still low at less than 30 per cent with a strong presence of informal sources. In 1972, efforts to improve institutional credit penetration were revived by assigning priority sector lending status to agriculture. This policy mandated a fixed percentage of credit disbursement towards agriculture.
Over the years, the scope of priority sector lending evolved to additionally focus on those segments of the population that were historically excluded from accessing credit, thereby making it a tool to address the problem of financial exclusion. But, despite almost six decades of efforts to expand the institutional credit outreach, as of 2013, only 61 per cent of the total credit disbursed to agricultural households came from institutional sources. Furthermore, to make matters worse, this limited access has been largely skewed towards the educated class and wealthier, land-owning farmers who belong the upper castes. Data shows that the small and marginal farmers (those owning up to 2 acres of land) constitute roughly 92 per cent of the total landholdings nationally, yet only received 29 per cent of institutional credit until 2012. Recently, the NABARD-All India Rural Financial Inclusion Survey 2016-17 also showed a similar direct relationship between asset holdings and formal credit access. Thus, not only is institutional credit access limited, it is also skewed away from those members of the agricultural community who would need it the most.
Clearly, while credit is an essential instrument to sustain household finance, relying extensively on formal credit channels can lead to the exclusion of small and marginal land-owners, who constitute more than 86 per cent of our country’s rural households. Such interventions can even deepen existing income inequality in rural communities. Further, while measures like interest moratorium do provide a greater repayment window, these do not address the ability of repay, particularly when economic activity is diminished. As a consequence, we need to be sceptical about the effectiveness of credit-based measures announced as part of the COVID-19 relief package.
This indicates the need for proportionately combining credit-based relief measures with alternative policy instruments that have the potential to perforate the barriers of asset ownership. Some relevant examples include the Pradhan Mantri Kisan Samman Nidhi Yojana (PM-KISAN) that provides an annual income support of Rs 6,000 in three equal instalments to small and marginal farmer families having combined land holding of up to 2 hectares. Even though the scheme does not cover landless or tenant farmers, it is able to put cash directly in the hands of small and marginal farmers, which is equitable, as it transfers higher rupees per acre to smallholder farmers. Data shared by the Ministry of Agriculture and Farmers’ Welfare shows that the coverage under this scheme is about 58 per cent with over 7.35 crore beneficiaries having received all the instalments since 2018. Another effective instrument could be the Mahatma Gandhi National Rural Employment Generation Scheme (MGNREGS) that guarantees hundred days of wage-employment within a financial year to rural households, thereby enhancing livelihood security in rural India. As of May 2020, the government ensured timely transfer of funds under PM-KISAN, while also encouraging increased enrolment into the MGNREGS.
In conclusion, the COVID-19 crisis and consequent lockdown measures have impacted the agricultural sector severely. While the government has come up with several measures to improve the situation, a majority of measures still revolve around enhancing credit availability. This heavy reliance on credit may not be desirable because the institutional credit mechanisms systematically exclude the most vulnerable sections of our society leading them into an inevitable poverty trap particularly during these times of crisis.
Shukla is research associate and Arora is assistant professor at Indraprastha Institute of Information Technology-Delhi