Thursday, 13 April 2017

Farm loan waiver is a necessity

    • About 50% of the population is engaged on agriculture directly, which makes farmers the most influential group of voters. Though not occupationally organised, their votes matter a lot and being perceived as pro-farmer has historically been the necessary requirement for being a popular political force in the country & states.
    • In Feb 1990, Madhu Dandavate, V P Singh’s Finance Minister in  NF government, announced a debt relief scheme for farmers covering waiving overdues or outstandings of farmers and artisans up to Rs 10,000, and involved a fiscal cost of Rs.10,000 crore.
    • Soon after the Modi government took over, bankers and RBI had warned the Finance Ministry of the dangers of such write offs. There was little support then from Delhi for the huge loan waivers announced by the newly formed states of AP and Telangana. As the Modi government worked on its first Budget, bankers, led by SBI chief Arundhati Bhattacharya and RBI Governor Raghuram Rajan, got together to stymie the proposal — finally forcing the state governments to settle for a rescheduling of the loans.
    • Prime Minister Narendra Modi made the first pitch at a UP elections 2017 political rally where he said, “I will make sure that the first cabinet decision after forming the government in Lucknow is to waive farmers’ loans. That pronouncement cast the die for UP, a state already struggling under a huge debt burden, writing off farm loans aggregating Rs 36,359 crore,  up to Rs 1 lakh for about 21.5 million small and marginal farmers.
    • Urjit Patel, RBI Governor, has voiced concern publicly over the latest loan waiver — saying it engendered a moral hazard and undermined the honest credit culture. As a matter of policy, nationalized banks do not write-off loans. The states will have to repay them on behalf of the farmer.
    • There does exist a distinction between farmers owning five acres of land and farmers owning land more than five acres. Such a distinction is not per se discriminatory. No one has a right to get a waiver of the loan availed by him. 
    • Hardly 30% of the farmers access institutional credit. A large section of those who access credit from banks are large farmers. Most small and marginal farmers took private loans as the process of obtaining institutional credit was cumbersome. 
    • The UP Govt wants to finance this waiver by issuing state backed farmers relief bonds issued by a state organisation, which the govt repays at a later date. Such a large waiver scheme would negatively affect the state budget deficit levels, endangers its credibility and makes it tougher to obtain loans in the future. But Govt bonds are not debts in the state budget and do not affect the fiscal deficit significantly. At present, UP’s estimated fiscal deficit is Rs 41,400 crores.
    • Development economists feel farm loan waivers are short-term measures, but are nevertheless necessary in times of severe drought or floods. However, they said that there was a deeper systemic problem that has pushed farmers strongly into the debt cycle.
    • The price for farm produce has stagnated over the years. On the other hand, cost of agricultural inputs have soared. This has drastically pushed up the cost of production. For example, after decontrolling fertilizers in 2010, the cost of a few fertilizers have gone up over 1400%. Whereas the Minimum Support Price for paddy has gone up a mere Rs 470 or 68% in the same period. Unless the government reduces cost of production and increases agriculture profit, farmers will remain caught in the debt cycle and the cycle of farm loan waivers would be inevitable.
    • The waiver of farm loans was not wrong in a situation where a debt-ridden farmer is debilitated by climatic conditions. The writing off farm loans adversely affecting the fiscal situation in states is small compared to subsidies doled out by govt for the corporate sector which is not seen as a burden.
    What ever can go wrong, has gone wrong with rural India.

    If a free society cannot help the many who are poor, 
    it cannot save the few who are rich ... John F. Kennedy

    Government's view of the economy in a few short phrases: 
    If it moves, tax it. If it keeps moving, regulate it. 
    And if it stops moving, subsidize it ... Ronald Reagan

    My View:
    Today in India farm holdings are largely fragmented with 90% farmers owning or cultivating less than 5 acres. The anti farmer government policies on fertilizers & support prices, bankers reluctance to lend aggressively to farmers, rampant adulteration of seeds & pesticides, labour issues arising out of MNREGS, erratic irrigation & agriculture power supply, climatic uncertainties and menace of middlemen in procurement of farm produce have resulted in once profitable agriculture activity into a non-remunerative activity. Improper storage facilities, badly implemented crop insurance schemes are bane to farmers. Lacking skills & capital, farmers are  trapped in agriculture permanently, irrespective of viability. Most government promises are just eyewash and at times of crisis farmers are silently left to their fate compelling suicides. In 1980's & 90's farmers availing crop loans were rare just below 10% and today they are over 90%. With reduced incomes and higher interest burden (70% credit is private credit at higher rates) farmers making both ends meet has become an impossibility. 

    Farming is livelihood for vast majority of lower classes, less educated, less skilled people of India (who are hitherto not employable in formal sector) and present policies are farming destructive. For a populous country like India, self sufficiency in food grains is a must. India is just self sufficient in food grains only because 40% of its population who are poor are surviving on just one square meal a day. If all rural people drops their non remunerative avocation and migrates to urban areas in search of livelihood it will be catastrophic for nation to face acute food shortage and its weak urban infrastructure will simply breakdown.

    In order to ensure decent livelihood for farmers and at the same time ensuring cheap and affordable food to all spectrum of poor people of country and in the absence of reliable inputs, crop insurance and marketing systems etc it is imperative to provide at least 60% of entire crop expenses as subsidy, 40% paid at the beginning of season and final 20% after verification of before harvesting as direct credit into their bank accounts. This subsidy can be rationalized as reliable systems develop and come into operation. This is not to save or enrich farmers but to stay put farmers in non remunerative agriculture and averting the nation from food crisis. 

    Until then periodic farm loan waiver schemes is a necessity and inescapable, no matter what our insensitive economic pundits from air-conditioned ivory towers say.

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