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Quick fix for the farmer

In the absence of patience and vision, the loan waiver remains the most favoured response to farm distress

Written by Tirtha Chatterjee , Ashok Gulati |
December 10, 2018 3:17:34 am
Quick fix for the farmer Accepting the demand for a debate in the Parliament is easy and it would help in understanding the real causes of farm distress, and the policies which could best help to tackle it. (Illustration by C R Sasikumar)

Thousands of farmers from different parts of India marched to Delhi on November 29-30 to register their protest against the Narendra Modi government’s perceived apathy and neglect of farmers’ demands. They were basically demanding three things: One, debate in Parliament to discuss farm distress; two, one-time loan waiver; and three, raising minimum support prices (MSPs) to 50 per cent above comprehensive cost (Cost C2) of production, and making MSPs legally binding on private traders — that is, if any trader buys below MSP, he should be put in prison for, say, three years.

Although the march was organised by the All India Kisan Sangharsh Coordination Committee, several Opposition parties of different hues came together to endorse these demands. The state assembly election results on December 11 will influence how far these demands are taken seriously by the government. Here, we look at the rationality and feasibility of these demands, and the consequences thereof, if they are accepted.

Accepting the demand for a debate in the Parliament is easy and it would help in understanding the real causes of farm distress, and the policies which could best help to tackle it. The second demand is of a one-time loan waiver. Although it is well known that loan waivers will not solve the problems of farmers, yet this demand is also likely to be met basically for votes. Already, from April 2017 to July 2018, several states (Tamil Nadu, Uttar Pradesh, Maharashtra, Punjab, Rajasthan, Karnataka and Andhra Pradesh) have announced loan waivers that together amount to Rs 1,82,802 crore (see graph 1). We expect that the remaining states are also likely to be added in this list during the run-up to parliamentary elections in April/May 2019. This may take the total loan waiver sum to more than Rs 4 lakh crore.

However, it is interesting to note that of the states that have already announced loan waivers, only a few budgeted them while many others have done just lip service so far. For example, Punjab announced a loan waiver of Rs 10,000 crore, but so far has budgeted less than Rs 600 crore. Further, it may be noted that it is the better ones in the peasantry which will benefit the most from this move. The small and marginal farmers often depend more on the money lenders, where the interest rates range from 24 to 48 per cent. What is needed is financial inclusion of these small and marginal farmers in institutional credit at reasonable interest rates and not outright loan waivers. These loan waivers will hit public investments in agriculture adversely and may even worsen farm distress in due course. It is a vicious circle.

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The third demand, of setting higher MSPs and making them legally binding, is the most strange. Although the Modi government is already drum-beating that they have fulfilled the Swaminathan formula by giving a 50 per cent margin over A2+FL, people in this business know that they have changed the reference cost from C2 to A2+FL, which is about 38 per cent lower. In any case, an MSP formula based on just cost, be it A2+FL or C2, ignoring its demand side, is patently inefficient. It will cost the nation heavily in due course.

Even in the current situation, the market prices are way below the MSPs announced in this kharif season (see graph 2). These are prices in the districts with the highest arrivals in the largest producing states. Market prices are even lower in many other districts. For example, moong market prices are 53 per cent lower than the MSP in Raichur, Karnataka. Now, making it legally binding will turn out to be anti-farmer as private trade will exit for fear of being jailed, and market prices will collapse even further. And the government does not have the paraphernalia to procure, store, and distribute 23 commodities for which MSPs are announced. It is not that higher MSPs cannot be given, but then government should just focus on 2-3 commodities and be ready to hold massive stocks, way beyond its buffer stock norms, as is the case with wheat and rice today. All this will amount to large inefficiency in the system.

PM’s AASHA (Annadata Aay Sanrakshan Abhiyan) tried to give support through three sub-schemes — the Price Support Scheme, Price Deficiency Payment (PDP) and Private Procurement & Stockist Scheme. However, none of the states has implemented the scheme. Even MP, which had piloted the PDP scheme in kharif-2017, has discontinued it. PM’s AASHA seems to have become the farmers’ nirasha.


What all this indicates is that India needs large reforms in its agri-markets, from reforming APMC markets to abolishing the Essential Commodities Act and rolling back all export restrictions. Encouraging contract farming, allowing private agri-markets in competition with APMC markets, capping commissions and fees to not more than 2 per cent for any commodity at any place in India, opening and expanding futures trading, negotiable warehouse receipt system, e-NAM with due system of assaying, grading, delivery and dispute settlement mechanisms, are some of the necessary steps needed urgently. Once this is done, major investments need to follow in improving the functioning of markets and building efficient value chains, especially of perishables. This can be done through the PPP mode, creating millions of jobs. But it needs sustained and focused efforts, steered by a strong minister as was done in the case of GST reforms. Only then, over a 3-5 year period, farmers can hope to get better and stable prices for their produce.

The time is also coming to think of a sustained income support for farmers. But who has the time, patience and vision to do all this in this political cacophony? Maharashtra, which made a small beginning on this market reform, rolled it back in the face of the traders’ strike. So the quick fix of loan waivers will win, and farmers will be back on the roads after another five years, asking for another loan waiver.

Gulati is Infosys Chair Professor for Agriculture and Chatterjee is Research Associate at ICRIER

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First published on: 10-12-2018 at 03:17:34 am
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