Loan waivers do not address farming crisis

With the announced Assembly elections to the five States and the impending general elections, political parties are in competitive populism mode to announce farm loan waivers as a bait. However, the micro-reality suggests that crop loans, and hence waivers, are generally not provided to tenant farmers. The rise of tenant farming among small and marginal farmers also coincides with growing fragmentation of land.

The Reserve Bank data for March 2016 on farm credit (Basic Statistical Returns) show that 77 million agriculture credit accounts with SCBs (scheduled commercial bank) carry an average loan ticket of ₹1.16 lakh. Around 70 per cent of them are crop loans.

The contagion of waiver started with the first loan waiver in 1990 and again in 2008 from Government of India. Andhra Pradesh and Telangana followed suit in 2014 and Tamil Nadu in 2016. Maharashtra, Uttar Pradesh, Punjab, and Karnataka in 2018 waived farm loans with thresholds ranging from ₹1-2 lakh per farmer. Each waiver has its variants in terms of content and delivery.

Tenant farming risks also accentuate the demand for write-offs. Tenant farmers’ loans are in the nature of gold loans and other forms of short-term credit, rather than crop loans.

Agriculture Ministry data pegging tenant farmers at 14 per cent of all farmers is a serious understatement, as more than 80 per cent of the tenancies are oral. Kerala is the only State that has a tenancy law in place with an implementation mechanism. Data on farmer suicides also confirm that they occur more among tenant farm holders and small and marginal land owners growing cash crops like cotton, than food or horticulture crops.

Combating credit risk in the farm sector rests more on crop diversification and cross-holding of risks between agriculture and allied activities, such as animal husbandry, than waiving bank loans.

Uneconomic holdings

According to NSSO (70th Round 2012-13), for the agricultural year 2012-13 rural India had an estimated total of 90.2 million agricultural households, which were about 57.8 per cent of the total estimated rural households during the same period. According to Agricultural Census 2010-11, 85 per cent of an estimated 138 million landholdings are marginal and small holdings as compared to a corresponding 62 per cent in 1960-61. The average size of small and marginal holdings was 1.42 hectare and 0.24 ha, respectively, in 2011-12.

Owing to fragmentation of land, the area operated by small and marginal farmers has increased from 19 per cent to 45 per cent of total cropped area in the last 50 years (1961-2011). This would mean that persons of small means and very low capacity to invest in technology and modern practices are engaged in agriculture.

Increase in farm labour costs by almost 100 per cent over the last decade directed the choice of product shifts in favour of labour saving crops. But these shifts did not favour the cause of land consolidation. Nor did they improve the marginal productivity of land. Even in regions of abundant labour supply, crops that do not require intensive input of labour and costly input of well irrigation are chosen.

In areas like coastal Andhra Pradesh that have a higher marginal productivity of land, tenant farming is of the order of 85 per cent of landholdings. This calls for a separate legislation to introduce loan eligibility cards for tenants.

Global examples

There are three successful farmer benefit programmes in vogue in the US since 2002: Annual Direct Payments; counter-cyclical payments if market prices are below the statutorily determined target prices (MSP); and loan deficiency payments or marketing loans that provide interim financing and additional income support if market prices fall below the statutorily determined prices.

These programmes provide a safety net to protect farmers from falling prices and raise farm income level but could raise land prices and concentrate on benefits to certain crops and producers. If agricultural insurance moves in tandem to cover the risks of farmer’s life and crops, such distortions could be contained.

Second, pressure on land can be evened out if value addition initiatives are simultaneously financed. Telangana has experimented with the direct cash transfers ahead of the crop season with life insurance of the farmers, the premium for which was paid out of the treasury. Such experiments needed supportive infrastructure like trained extension staff and clean land records. Had the tenant farmers with a sworn affidavit of their terms of tenancy been covered, the experiment may have been more inclusive.

The writer is an economist and risk management specialist.

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