An answer to rural distress

Three significant solutions have been doing the rounds: Higher minimum support prices (MSPs), loan waivers, and direct income/investment support. In this article, we evaluate the three to identify one that can be a winner, both politically and economically. For political acceptance, we evaluate the scheme for its reach among the targeted beneficiaries, the farmers, and, for economic viability, we compare costs and benefits.

Congress President Rahul Gandhi promised higher MSP for paddy (Rs 2,500 per quintal) in Chhattisgarh and loan waivers in the three states where his party emerged victorious. He is quite likely to take this model to the Lok Sabha elections. Similar promises by Prime Minister Narendra Modi during campaigning for the UP assembly elections in 2017 led to gains for the BJP. The PM promised a loan waiver and higher MSPs for 23 commodities. There was a difference, however, in the MSP increase formula offered by the two parties. While the Congress promised an MSP increase of 50 per cent over C2 that is, the comprehensive cost, PM Modi promised the same increase over A2+FL, that is the paid-out costs plus family labour. It may be noted that C2 is about 38 per cent higher than A2+FL.

Source: Nabard Nafis

The irony of a MSP policy is that it pertains to a limited number of farmers. As per NSSO 2012-13, less than 10 per cent of the country’s farmers sold their produce at MSPs — the percentage though is a little higher for sugarcane, wheat and rice farmers. If one accounted for the increased procurement of pulses and oilseeds during 2016-17 and 2017-18, this percentage is still not likely to exceed 20 percent. Moreover, MSP operations mostly benefit large farmers who have marketable surplus; these operations exclude much of country’s marginal farmers who produce little surplus. Besides, the large inefficiencies and market distortions caused by a MSP-regime make it an unfavourable choice. For example, even now, wheat and rice stocks with the government (45.4 MMTs) are more than twice its buffer-stock norms (21.4MMTs), reflecting massive economic inefficiency, not counting the leakages and corruption in the MSP operations of procurement, stocking and distribution.

Let us now consider the loan-waiver option. As per NABARD’s Financial Inclusion Survey (NAFIS), between July 2015-June 2016, 43.5 per cent of all agri-households took loans. Of these, 69.7 per cent took institutional loans — 60.5 per cent took only institutional loans and 9.2 per cent took both institutional and non-institutional loans (See Figure 1). This means that about 30.3 per cent (69.7 per cent multiplied with 43.5 per cent) of Indian agri-households took loans from institutions. A loan-waiver is thus likely to benefit only this 30 per cent — even a subset of it, if conditions are imposed on loan waiver schemes. The remaining 70 per cent of Indian farmers, who do not access institutional credit, will not benefit from this scheme. Such high rates of exclusion must be the single-most important failure of our banking system with regard to financial inclusion.

The conclusion, thus, is that through higher MSPs or through loan-waivers, one cannot reach more than 20 to 30 per cent of Indian farmers. This limited reach, therefore, cannot redress the widespread grievances of Indian farmers. Farmer leaders, as well as governments who swear by farmers’ interests, need to make note of this important point.

The third option, pioneered by the Telangana government is income/investment support through the Rythu Bandhu Scheme (RBS). Telangana started RBS in May 2018, whereby it gave Rs 4,000 per acre to every farmer. This transfer is made twice a year, coinciding with the two cropping seasons. By directly giving cash, the KCR government aims to support the input purchases of farmers. The scheme is said to have reached almost 93 per cent of landowners and has clearly yielded political benefits to the TRS – the party won a landslide victory in the elections to the Telangana assembly.

In terms of costs, our estimates show that a national farm-loan waiver is likely to cost about Rs 4 to 5 trillion. An RBS-style income transfer is likely to cost about Rs 2 trillion (with some improvisation to include tenants, and restrictions to the actual cropped area). A price-deficiency based payment or actual procurement under MSP operations, if done at a large-scale, is going to cost about Rs 1 to 1.5 trillion (depending on whether market prices are 20 per cent or 30 per cent below MSP). Such operations, of course, are likely to be prone to large-scale corruption. Even then, MSP policy and loan waivers are much more distortionary than income/investment support policy.

A cost-sharing arrangement between the Centre and states is required to bear such a burden. Eventually, an income transfer policy should be combined with direct cash transfer in lieu of fertiliser and power subsidies to make the policy meaningful.

The time is ripe for action; one hopes the government acknowledges the reality of farm distress and tries to resolve it on priority.