Millennium Post

Reforming policies

Resolving India’s agricultural crisis through economically efficient alternatives is the challenge for Modi government ahead of the interim Budget

Reforming policies

After the surprising state assembly results of Chhattisgarh, Madhya Pradesh and Rajasthan, the upcoming interim Budget is quite unlikely to be a traditional vote-on-account.

It is a common election-year convention that the Budget presented by the outgoing government is delivered with the intention of securing Parliament's approval for the expenses that are to be incurred until a new government assumes power. However, after the precarious position of the government in the recent elections, the Budget might be more populist in nature.

An issue that will gain particular prominence is the persistent problem of farm distress. The problems ailing the agriculture sector are only growing in magnitude with each passing year and it has become a pressing issue affecting a majority of the country's population. However, little has been done to find a long-term solution to the crisis. Instead, it has often been used as a tool to win elections by promising farm loan waivers.

Since April 2017, eight states have given farm loan waivers, which have amounted to a staggering total of Rs 1.9 lakh crore (two-thirds the defence budget for 2018-19). Rahul Gandhi has even promised a nation-wide farm loan waiver if the Congress is voted to power in the upcoming general elections.

By all means, farm loans waivers are a poor move to address the farming distress effectively. First, it impacts a significantly low segment of agricultural households. As per NABARD data, only 43.5 per cent of households took loans between July 2015 and June 2016. Among these households, 69.7 per cent of them took institutional loans. This implies that, as a percentage of total agricultural households, about 30 per cent (69.7 multiplied by 43.5) of agricultural households took institutional loans. Loan waivers would benefit only this segment of the population leaving 70 per cent of the farming community out of its ambit.

Second, moves like farm loan waivers stretch government finances and have an adverse impact on the fiscal health of the economy. India has consistently missed its fiscal targets and cannot afford to continue doing so. When government funds are diverted to cater to such demands, it leaves little for developmental purposes. Third, loan waivers also have a damning impact on the credit culture of the country. An eventual assurance by the state to waive loans creates a classic problem of a moral hazard where the borrowers have no incentive to meet their commitments.

More robust measures are needed to overhaul the crisis-ridden agriculture sector. Any attempt to use minimum support price (MSP) as a means of resolution also proves problematic as it only distorts markets and results in overflowing government stocks that cannot be afforded without incurring excessive losses. Moreover, MSP operations only benefit the large farmers who have a marketable surplus – excluding a majority of the agricultural community.

Amidst all these instances of economic inefficiency, a few states are trying out innovative ways of reaching the maximum proportion of farm population. The Telangana government, for instance, is attempting income and investment support to farmers through its Rythu Bandhu Scheme (RBS), wherein it transfers Rs 4,000 per acre to every farmer in the state. This is done twice a year to coincide with the two cropping seasons. The cash support helps farmers with their input purchases. The scheme has proven to be more successful than either of the aforementioned practices. It has reached more than 90 per cent of the landowners in the state.

The Telangana scheme is, however, solely focused on landed farmers while neglecting tenants. The Odisha government has gone a step further with its Krushak Assistance for Livelihood and Income Augmentation (KALIA) scheme. Under this, the state has promised to make one-time payments to tenants and agricultural labourers. The only challenge will be to effectively identify the latter two categories as no legal records exist.

Nevertheless, such attempts are the best bet to resolve the agricultural crisis in India as they create the least amount of market distortions and are also economically efficient as the scope of leakages and corruption is minimised if the challenge of identification is overcome.

An ICRIER-OECD study on Indian agricultural policies released last year estimated the market distortions created due to interventionist and restrictive policies depress producer prices below international market levels. As a result, the gross farm revenues fall by over 6 per cent per year on an average.

Such policies, therefore, implicitly tax the Indian farmer. The Modi government has an opportunity to move away from the status quo in the upcoming Budget by enforcing solutions that can infuse structural transformations of the Indian farmland. Until India reforms its arcane agricultural policies that have been driven by short-termism, the age-old problem of the distressed Indian farmer cannot be resolved. At least now we have actionable policy choices insight that seems to be working in the Indian context.

(The author is chair, Institute for Competitiveness. Chirag Yadav, Senior Researcher, Institute for Competitiveness, has contributed to the article. The views expressed are strictly personal)

Amit Kapoor

Amit Kapoor

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