India Economy

Farmers need to think beyond loan waivers

Rajalakshmi Nirmal | Updated on June 10, 2018

They should instead ask for rescheduling of principal and interest re-payments

In India, where millions of people go hungry every day, the act of spilling thousands of litres of milk on road, as was seen last week in Jaipur and Bhopal, is unacceptable. Prices of vegetables shot up in Madhya Pradesh, Gujarat, Maharashtra, Rajasthan, Punjab, Uttar Pradesh and Haryana last week as farmers refused to take the produce to markets.

Multiple farmer protests over the past two years have not resolved the problem of low crop prices. It is high time farmer groups called for a long-term solution. Clearly, none of their current demands — loan waivers, MSP hike or implementation of the Swaminathan Committee Report — will end their misery. Farmer organisations should demand higher investments in supply chain and cold-storage facilities to handle surplus crops, modifications to the crop insurance scheme, and more ways to bolster non-farm income.

A short-term fix

Loan waivers happen every year, and if its election time, we see more demands and more promises on writing off loans. But aside from guaranteeing electoral victory, the waivers do little to improve the condition of farmers. These do not help in recovery of rural spending or investment.

A World Bank paper states that there is absolutely no impact of a farm-loan waiver on rural productivity, wages and employment. In fact, loan waivers only multiply the problems of farmers by tarnishing their credit history and restricting access to institutional credit.

RBI data show that non-performing assets in agriculture for commercial banks rose after the 2008 debt waiver programme. (The then Finance Minister P Chidambaram wrote off a massive ₹50,000 crore of farm loans.) Between 2009-10 and 2012-13, NPAs of scheduled commercial banks (in agriculture) rose from ₹10,353 crore to ₹30,200 crore.

Loan waiver also creates a moral hazard and spoils the credit discipline among borrowers; banks reduce their lending in the regions where loans have been waived off. This results in small and marginal farmers being pushed to take credit from non-institutional sources at a high rate of interest. Thus, while a loan waiver gives some instant respite, it is only detrimental to farmers.

Farmer organisations, instead, should demand rescheduling of the principal and interest due on the loan in 2-3 years. The Centre can learn from how the Kerala State Farmers’ Debt Relief Commission works. Farmers of the State who make an application for debt relief are considered on a case by case basis by a Bench constituted by the Commission. Depending on the income level of the farmer (below ₹2 lakh per annum) and his outstanding loan, the relief amount is decided. The Commission pays the amount waived off, and the borrower is given 3-12 months to repay the balance, depending on his/her financial condition.

MSP hike

Minimum support price is announced for 22 crops every year, but procurement is effective only in paddy and wheat (and in cash crops where there is direct procurement by industry bodies or mills — cotton and sugar cane). So, what’s the use of simply increasing the support price when the government cannot enforce it?

Also, with MSP, the problem is not about the margin — the Centre is willing to give farmers more than the the cost of production — it is about the ‘cost’ itself.

Even if the government gives 50 per cent margin on cost, all farmers may not be happy. This is because the cost of production differs from State to State, and to fix the MSP, the Commission for Agricultural Costs and Prices (CACP) averages the cost across States. Farmers in Kerala, where labour costs are high, or those in Andhra Pradesh and Maharashtra, where the cost of inputs including seeds, fertilisers and manure is high, may still feel short-changed.

However, if farmers still feel they need a support price, they should demand for making MSP enforceable under law.

Today, employing labour below minimum wages as fixed by the Labour Department, is a criminal offence. Why can’t this be the case with MSP, too? But then, the problem is, it will interfere with market forces. It can de-link the domestic commodity prices from prices in the international market, and make Indian exports uncompetitive.

Farmer organisations should demand ‘income security’ rather than targeting MSP. A fixed income flow is possible only if farmers diversify into non-farm activities. This will ensure farm households have income to fall back on even in bad years for agriculture. Farmer organisations should demand Centre’s investment in creating additional sources of income through activities such as poultry farming, cattle breeding or fisheries.

The best way to address the problem of low prices, however, is to build a post-harvest infrastructure.

During bumper harvests, when the market is flooded with excess produce, farmers today have no option but to sell their produce at cheaper prices.

To change the situation, the government has to build more storage facilities. Allowing more private-sector investment in warehousing, can help. Given that it will be a capital-intensive activity, the government should promote investment by offering incentives.

Farmer organisations should also demand investment in processing facilities — for grading, sorting as well as processing of produce — that will get them better price realisation.

Published on June 10, 2018

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