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Tuesday, May 24, 2022

From plate to plough: If you want to help farmers

Loan waivers are poll bait. What is needed is a structured and stable income support policy.

Written by Ashok Gulati , Prerna Terway |
Updated: December 24, 2018 5:05:00 am
farm loan waivers, farm waivers, farm waivers elections, Chhattisgarh farm waiver, madhya pradesh farm waiver, farm distress, farm distress india, congress farm waivers, bjp farm waivers, msp, indian agriculture  Although loans have been waived within hours/days of taking oath by new CMs, it may take quite a long time, maybe two-three years, to really honour this commitment. (Illustration: C R Sasikumar)

The talk of the season on the farm front seems to be loan waivers. Farmer leaders are asking for it and those looking for power are ready to oblige. Newly elected chief ministers of Madhya Pradesh, Chhattisgarh and Rajasthan have all announced loan waivers within their promised time of 10 days. It may cost the state exchequers more than Rs 50,000 crore. The Congress president has also challenged the prime minister that he will not let him sleep unless loans of all farmers are waived. He also scored a brownie point by saying that if government can “waive off” Rs 3.5 lakh crore for 15 business families, why not for millions of farmers.

So now, as most professional economists say, it is a race to the bottom. But we call it atonement for not reforming agriculture and following restrictive trade and marketing policies which, as per the OECD-ICRIER report, inflicted an implicit tax on farmers to the tune of 14 per cent of their gross farm receipts over a period of 2000-01 to 2016-17. Needless to say, it is bait for voters. The big question is: How much is a pan-India loan waiver likely to cost, and is there a better way to distribute these resources? Our rough calculation is that it will cost anywhere between Rs 4 and 5 lakh crore, including states that have waived farm loans since 2017.

In this context, it may be noted that in September 2018, total outstanding credit from scheduled commercial banks (SCBs), including Regional Rural Banks (RRBs), to the agriculture and allied sector was about Rs 10.5 lakh crore. If one adds to it the share of Primary Agricultural Societies (PACs), the total outstanding credit to agriculture currently is likely to be around Rs 12-13 lakh crore. If all of this is waived off, as the rhetoric of loan waivers goes, it will simply blow up the budget. It is not feasible. So, everyone will cut corners, sometimes drastically, to sift between the rhetoric and reality of budgets. Several restrictions will be put, such as limiting it to short-term crop loans only (the ratio of short term loans to long term loans is generally 70:30), maximum limit of say Rs 2 lakh per farmer, and, only from nationalised banks and PACs (as the Madhya Pradesh order suggests). Despite these restrictions, we feel the total bill is not likely to settle below Rs 4 lakh crore, and may even touch around Rs 5 lakh crore. Ironically, the current spate of loan waivers was triggered by the prime minister himself who dangled this bait first to the voters just before the UP elections. Now, the Congress president is beating him with the same trick.

[ie_backquote quote=”The big question is: How much a pan-India loan waiver is likely to cost, and is there a better way to distribute these resources? Our rough calculation is that it will cost anywhere between Rs 4 and 5 lakh crores, including states that have waived farm loans since 2017.” cite=”Ashok Gulati and Prerna Terway”]

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Interestingly, although loans have been waived within hours/days of taking oath by new CMs, it may take quite a long time, maybe two-three years, to really honour this commitment. To get a sense of this, one may look at the 2008 mega loan waiver of Rs 71,680 crore announced by the UPA government. It amounted to 20 per cent of total outstanding loans to agriculture in 2008, and actual disbursement was just Rs 52,516 crore over a period of four years, as per the report of the CAG on Implementation of Agricultural Debt Waiver and Debt Relief Scheme (2013).


In any case, we feel that the loan waiver is only a temporary relief, that too tilted towards larger farmers. It may be noted that institutional credit comprises about 64 per cent of total credit taken by all farmers, the remaining 36 per cent coming from non-institutional sources (graph 1).

Graph 1

Further, it is highly iniquitous as it is the large farmers who take a larger proportion of their credit from institutional sources (about 80 per cent, see graph 2).

Graph 2

The marginal farmers with holdings of less than one hectare, who constitute 68.5 per cent of the peasantry, actually take more than half of their loans from non-institutional sources at interest rates that range from 24-36 per cent, and sometimes even higher.

Can there be a better method to support farmers instead of this haphazard manner of loan waivers, or through higher MSPs which are market distorting? The alternative is to think of a structured and stable income/investment support policy for farmers. An improvised version of Telangana’s Rythu Bandhu scheme could serve as a starting point. Under this scheme, the government can give Rs 10,000/ha as investment support to cultivators. Payments under this scheme could be inversely related to the holding size, making it more pro-small holders. Farms can be geo-tagged to ensure that only those farmers get benefits who are cultivating land. Land records will have to be upgraded to include tenants. Government records still show only 10 per cent of tenancy in the country while ground realities are very different. In any case, if this scheme is implemented in over 20 crore hectares of gross cropped area of the country, it will cost about Rs 2 lakh crore per annum, which could be equally distributed between the Centre and the states. The Centre should also include fertiliser subsidy into this and encourage states to transfer their power subsidy through this platform based on per hectare basis. Such a policy can reach the largest number of farmers, be more equitable, the least market distorting, and predictable. The costs are high, but so are the costs of food subsidy for consumers (Rs 1,69,000 crore). Striking the right balance between consumers and farmers is the need of the hour.

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