Fire on the Farm

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Agricultural loan waivers may buy some political space but they make for poor economics

IT HAPPENED SUDDENLY one day in Pipliya Mandi early in June. After days of protest, farmers in this dusty town of Mandsaur district, some 350 km from Bhopal, lost hope and turned restive. Two days later, on June 6th, at another violent demonstration—one that challenged the writ of the district administration—five farmers died in police firing. Within no time, this farmers ‘movement’ spread from Mandsaur to other districts of Madhya Pradesh. Neemuch, Sehore, Indore and Bhopal, all were affected. What happened in Pipliya, a small trading town with a local agricultural market, is symptomatic of how such protests erupt. Farmers, with unsold loads of onions, learnt that prices had crashed from Rs 10 to Rs 2 per kg. Sitting in India’s urban centres, it is hard to grasp what this means to farmers in what is a troubled sector of the economy. Not only was there a price collapse, what made it doubly difficult was the level of indebtedness among cultivators.

Within days, the state government announced a price stabilisation fund of Rs 1,000 crore and assured farmers they would not suffer from the vagaries of price fluctuations. But by then, other factors had overtaken events. A rival bunch of ‘farmers unions’ clashed with one another in a bid to occupy hard-won political space. Then there were peculiarly local features that inflamed the situation. Apart from onions, Mandsaur is known for another—less than savoury—commodity: opium. This is produced under government licences, and, in spite of tough vigilance, smugglers are always on the prowl to get the opioid. This group had its own ‘grievances’; as Chief Minister Shivraj Singh Chouhan later claimed, ‘anti-socials’ had also begun fishing for trouble in the already muddy waters of western Madhya Pradesh.

The lesson was not lost on other states staring at similar farming issues: nip the problem in the bud before things get out of hand. The ripple effect was felt across India. While MP has withstood calls for a debt waiver, many other states could not. There were farmer protests in Maharashtra, which was already reeling under a mismatch between a five-fold increase in pigeon pea (tur daal) production and an unchanged Minimum Support Price (MSP). In Punjab and Karnataka, a similar dynamic took over. The parties ruling Punjab and Uttar Pradesh had made election promises to tackle farm debt, but these are usually back- loaded in the election cycle. Waivers tend to be done close to the next election and not right after winning one. But such was the intensity of what happened in MP that political caution demanded a quick response, lest protests take a life of their own.

In the bargain, however, important questions have been set aside. One of these concerns the viability of loan waivers. An even bigger issue is the efficacy of forgiving loans: do such programmes help farmers or are they just measures that buy some time, kicking the can down the road?

CONSIDER UTTAR PRADESH, the state that kicked off the latest round of loan forgiveness. It was part of the electoral promises made by Yogi Adityanath, and his government lost little time in delivering on it: within a fortnight of being sworn in as Chief Minister, he announced a waiver amounting to Rs 36,359 crore. It is not just the sum that is staggering, but the number of farmers who stand to ‘gain’. Of the 23 million agriculturalists in the state, roughly 21.5 million or 92.5 per cent of all, stand to benefit from the scheme. The plan is to write off loans of small and marginal farmers— defined as those with land holdings up to 5 acres—to the tune of Rs 1 lakh each.

A grand pardon on a similar scale is at play in Maharashtra, where Chief Minister Devendra Fadnavis announced his waiver recently. Of the 13.6 million farmers in the state, 890,000 are expected to gain from the decision. Irrespective of the size of their landholdings, they will see Rs1.5 lakh of their debt wiped off. Close to 400,000 farmers will get to start with a clean financial slate: their entire debt burden reduced to nothing. The overall bill: Rs 34,000 crore.

Not to be left behind, Punjab—once considered the most advanced agricultural state in India—announced its own plan on June 19th. Debt has been written off up to Rs 2 lakh for small and marginal farmers and a flat Rs 2 lakh for all other marginal farmers, regardless of the land they hold. Over a million farmers will benefit from this. At the moment, the final sum involved in Punjab’s announcement is not clear. In this year’s state budget, a sum of Rs 1,500 crore has been kept aside for the programme, which is inadequate, given the numbers involved.

Finally, Karnataka, another major state, joined the bandwagon on June 21st when it announced its own waiver, meant to benefit 2.2 million farmers. While relatively limited in its scope—the write-offs will involve state cooperative banks—a bill of Rs 8,165 crore stares at the state government.

The first thing to note about these loan waivers is their sheer scale and the sums of money involved. The four states are major agricultural states with each producing large amounts of wheat, rice and sugarcane, among other crops. In each state—especially UP and Maharashtra—the debts of a majority of farmers have been pardoned. In four states, close to 25 million farmers have come under the waiver net. This is a significant fraction of the total number of farmers in India—roughly 120 million in 2015. The scale betrays the intensity of India’s farm crisis.

Chief Minister Devendra Fadnavis has announced his own grand waiver for Maharashtra. Of the 13.6 million farmers in the state, 890,000 are expected to gain from the decision. The bill: Rs 34,000 crore

Now consider the cost. If UP, Maharashtra and Karnataka are taken into account (as Punjab’s numbers are still unclear), the write-offs will set these states back by Rs 78,000 crore at least. This is nearly $11.4 billion. In comparison, a country-wide waiver in 2008 had cost the Centre $17 billion. Today, just three states have a tab which is two-thirds of that.

Only Maharashtra has the financial wherewithal to foot the bill. As one of India’s more industrialised states and home to the financial capital, Mumbai, it has a much better revenue base to fund such programmes. This cannot be said of Punjab and UP, among the more fiscally stretched states of India. Punjab is saddled with a debt of Rs1.82 lakh crore, representing a more than three-fold increase in the last 10 years. With a debt-to-gross state domestic product (GSDP) ratio of 42 per cent, it is one of the hardest pressed states. By its own admission, ‘the state’s revenue is not even able to meet the salary, interest, pension and power subsidy payments. These four items alone account for 102 per cent of the state revenue receipts. The situation was so bad that the Reserve Bank of India (RBI) stopped payments to the state government for the first time in March 2017 due to long overdraft.’ To keep matters in perspective, Punjab’s interest payments this year are expected to be around Rs 14,910 crore, while some estimates put the cost of the loan waiver at Rs 24,000 crore.

No less alarming is UP’s financial position. In the last five years, its debt has galloped by more than Rs 1 lakh crore to 3.75 lakh crore (as on March-end this year). While the waiver was announced with much fanfare, it is still not clear where the money will come from. By one report, the state government may issue ‘farmer relief bonds’ to fund its scheme. But this raises more questions than provide answers. Who will buy these bonds? Even if these get market subscriptions—assuming that UP makes such an offer—the conditions demanded by lenders would be painful. The other alternatives, of raising taxes within the state or asking the Union Government for help, appear closed. The former option is highly unlikely to yield funds as UP’s tax base is already weak and any more levies will create problems; as for the latter, the Centre has told states on a waiver spree that they would have to find their own resources.

BEYOND THOSE ISSUES lie a problem crying out for addressal. What to do with India’s crisis-ridden farm sector? Loan waivers are now almost a decadal feature in India. The UPA Government’s waiver of 2008 cost what was 1.6 per cent of the country’s GDP then. A 2014 World Bank study found that its effects were largely negative. One, lending by government banks slowed to a trickle in districts where farmers availed most waivers. Two, farmers stopped repaying loans in anticipation of a future pardon. Three, while the pet theory of those who pitched the scheme was that farmers were indebted and therefore could not invest in vital equipment and inputs like better seeds, fertilisers and modern equipment, the study found no positive effect on farm investment after the waiver. Perhaps this is one reason why the NDA Government has not encouraged loan waivers: their negative effects are well known while the positive effects are more or less illusory.

There are, however, other problems that need to be fixed on the administrative level, ones that are usually not tackled until a crisis acquires a political colour. The best example currently is Maharashtra’s tur daal crisis. This year, there was a sudden five-fold spurt in output even as the MSP was not increased. The result was that the bottom fell out of the prices at which farmers sold their crop. Another example of this comes from MP. In recent years, the state has seen agricultural growth in excess of 20 per cent a year, making it one of the fastest growing states. With huge supplies comes the danger of falling prices. In recent years, India has seen a steady downtrend in the prices of agricultural commodities across the board, leading to farm distress.

At one level, MSPs are supposed to function as a safety net for farmers. By definition, an MSP is a floor price and crops are not supposed to fall below this level. On the ground, that often happens. Should India go for a price stabilisation fund—a pot of money that can be used to intervene in markets when prices fall below a certain point?

“India does have a limited price stabilisation fund. However, the objective from what I can see is the protection of consumers from high prices. So, it seems to operate one way—that is, when prices threaten to be too high. It is not clear to me how it will operate to the farmers’ benefit when prices are too low,” Ajit Karnik, professor of economics at Middlesex University Dubai, tells Open. Professor Karnik recently carried out a study of the link between collapsing prices of pulses and farmer protests, and found a clear correlation.

Suggestions have been made earlier—for example, by the then Chief Economic Advisor Kaushik Basu—that governments should purchase crops in years when prices are likely to fall, and sell in the open market when prices rise beyond a reasonable level. That way, both consumers and farmers are protected. But the way policy has operated in India for a long time, ‘price stabilisation’ tends to favour consumers more than farmers. The other issue is one of MSP coverage. As of now, the bulk of the money spent by governments is on buying wheat and rice from farmers in Punjab, Haryana and UP. The coverage of these operations in most other parts of the country is patchy or non-existent. If nothing else, equity demands that poorer farmers, ones who grow pulses and other non- traditional cereals and crops, be afforded MSP protection. Unless that happens, the combination of small farm sizes, high agricultural costs and rock-bottom prices will ensure that more Mandsaurs erupt in fury.