TALK POINT: Is it time to revisit the culture of farm loan waivers, minimum support prices and take on this,’moral hazard’?

June 14, 2017

As Uttar Pradesh and Maharashtra write off farmers’ loans and Madhya Pradesh, Haryana, Rajasthan and Punjab struggle to tackle fresh demands for debt relief, Finance Minister Arun Jaitley says the Central government will not help foot the bill. And RBI Governor Urjit Patel calls loan waivers a “moral hazard”. Is it time to revisit this culture of farm loan waivers? We ask experts.

Indian farmers are glorified prisoners, indentured to produce food on the cheap — Aruna Urs, a farmer-in-residence at the Takshashila Institution, Bengaluru.

The arrival of pre-monsoon summer showers triggers one of the oddest phenomena, probably exclusive to India. Farmers start queuing in the wee hours in front of a small window at their respective tehasildar’s office to get a certified land record extract of their land. Then the queue moves to the nearest bank or credit co-op to apply for the crop loan. After legal vetting, the mayhem moves back to the sub-registrar’s office to lien the property to the creditor. Armed with less than sufficient ammunition in his bank account, the farmer then mulls around the agriculture office waiting for the arrival of department-approved seeds and fertilisers.

Meanwhile in New Delhi, experts at the Commission for Agriculture Costs and Prices, in an attempt to achieve the unholy trinity of keeping consumers, farmers and the government happy, arrive at minimum support price for major crops. By the time the Union cabinet approves the list, the farmers would have already taken the sowing decision.

During the crop cycle, the farmer is as vulnerable as his crop to the vagaries of weather and pests. Undeterred, he continues to spend on children’s education, on matters of health and festivals, hoping the crop will rescue him from the pit. On the day he carts the produce to the mandi, the twins–NAFED and FCI–are absent and the commission agent quotes a price that is, to say the minimum, unsupportive of the endeavour to secure his family’s future. Property lien is released after crop loan repayment in full, and with clear land title, he awaits the next pre-monsoon to try again. After many unsuccessful attempts, farmers turn violent that usually ends after a few take bullets. Governments waive off loans, banks release liens of defaulters and the whole cycle restarts again. Rinse and repeat.

Indian farmers are glorified prisoners. Firmly shackled to their fields, they have been indentured to produce food on the cheap for the rest to either relish the produce or on his plight, usually both. Annadata sukhibava.

Loan waivers encourage states to be fiscally reckless — Praveen Chakravarty, Senior Fellow, IDFC Institute, Mumbai.

Whether farm loan waivers are good or not is a false binary. Loan waivers, be it agriculture or corporate loans, for farmers or industrialists, can be good or bad depending on the context and circumstances. It is only important that the decision to grant such waivers should also fully capture the costs of such decisions. Agriculture is a state legislative subject. A state government announcing farm loan waivers should also bear all the fiscal consequences of it.

Today, state governments announce farm loan waivers which are financed directly or indirectly (through special grants for schemes) by the Union government. The Union government’s finances in turn are bolstered by tax revenues from a handful of states. So, in essence, the richer states are paying for the poorer states’ farm loan waivers. This leads to a moral hazard problem for states which are encouraged to be fiscally reckless.

If the Union government were to allow the state governments to fend for themselves, it is likely that such loan waiver policies will be more measured and granted only under true emergencies. If say, the UP government knew clearly that farm loan waivers would mean cuts in budgets to say education or health or drinking water, then it would make a more judicious choice. In the absence of this, there is every incentive for the UP government to reap the benefits of loan waiver policies without having to bear the true costs of it.

The debate over whether farm loan waivers are driven by economics or politics is banal. One cannot separate the two in an electoral democracy.

Loan waivers epitomise the saying: “The path to hell is paved with good intentions” — Mandar Kagade, policy analyst, Bharti Institute of Public Policy, ISB, Hyderabad. (Views are personal)

It is a classic case that American economist and social scientist Mancur Olson taught us: Concentrated interest groups (the farmers’ lobby here) are subsidised at the expense of taxpayers. The existence of rents in the form of loan waivers, MSP and subsidies has catalysed a vicious circle in which neither the political parties nor the farmers’ representatives have any incentives to find supply/demand structural solutions to reform farming. As a result, farming has remained an outdated, low-yield occupation, exposed to a range of risks with farmers caught up in a perpetual cycle of debt and poverty.

Moreover, there is empirical evidence that measures such as loan waivers epitomise the saying: “The path to hell is paved with good intentions”. Two economists of the World Bank collected a large panel dataset of debt relief amounts and economic outcomes for all of India’s districts, spanning the period 2001–2012 and asked the following questions: Are borrowers in regions that received larger bailout transfers more likely to default after the programme? Was debt relief effective at stimulating investment, productivity or consumption? Their research found that borrowers in areas that received high proportion of bailout funds started defaulting in large numbers after the programme, thus indicating the borrowers’ “moral hazard”. Furthermore, banks redirected credit to less risky regions after the programme. The above-median bailout regions received a mere 36 cents of new lending on every USD written off. Finally, they found no evidence of greater investment catalysed by the bailout.

If you want to kill farmers make them face the tyranny of markets — Devinder Sharma, food policy analyst

What an absurd question. It only tells us how disconnected people in the media are with the existing ground realities. I have always been told that if you want to kill a lamb put it before the wolves. Similarly, if you want to kill farmers make them face the tyranny of markets.

Those who advocate the withdrawal of the assiduously built food security system, of which the Minimum Support Price (MSP) is an essential part, are actually wanting to create conditions forcing farmers to abandon agriculture and migrate to the cities looking for menial jobs.

If the farmers have kept the country well-fed all these years it is because they were assured of an output price (in the form of MSP) for the staple foods, wheat and rice. If there was no MSP, let me make it clear there would have been no Green Revolution. A bountiful harvest results in prices crashing. Withdraw the MSP now and the country will slide back to the days of ‘ship-to-mouth’ existence, when the country relied on food imports under PL-480. In fact, at present only 6 per cent farmers get the benefit of MSP. The remaining 94 per cent are in any case dependent on markets.

If the markets were so efficient, there would have been no need for farmers to commit suicide. The challenge therefore is to see how the remaining 94 per cent farmers are brought under the ambit of MSP. Let me make it clear. By providing MSP we are not doing a favour to farmers. Even despite the low MSP provided, which only covers the cost of production, in reality it is actually the farmers who have been subsidizing the nation all these years.

The electoral promise made in Uttar Pradesh has caused a domino effect across seven other states — Ajit Ranade, Economist

When the patient is in a super critical condition, your options are limited. You use drugs that are known to have harmful side effects, since you want some instant relief. The case of loan waivers for farmers is similar. It is a build-up of policies and missteps that go back decades, if not half a century.

The one sector, which was bypassed completely in India’s liberalisation was agriculture. Shackled by numerous policies, often inconsistent with each other: compulsory and monopoly procurement, price controls on inputs and outputs, quantity controls, subsidised inputs cornered by larger farmers or subject to black markets or unavailability, draconian measures to check leakages, prohibition on tenancy farming, hedging and speculation. One could go on.

But in the present situation, it is of course impossible, and unwise, to unload all these reforms all at once. The electoral promise made in Uttar Pradesh has caused a domino effect across seven other states. It is not often that one can mobilise millions of unorganized farmers into a state-wide agitation. So, their pain is genuine, and distress calls for relief must be heeded.

What is alarming is that despite ever increasing minimum support prices, historically highest credit inflow, bumper crop and a healthy monsoon, we still have farm distress. There will be a heavy price to pay for loan waivers, which are difficult to deny in the present atmosphere of large-scale write-offs of corporate loans. Loan waivers create similar expectations for the future, do not benefit half the farmers under informal indebtedness, punish those who toiled and repaid their loans, and invite possibility of crookery and fraud.

We can only hope that this crisis of loan waiver leads to genuine and sustained reforms in the farm sector.

People living in glass houses better be prepared for many discomforting questions from farmers — P. Chengal Reddy, Chief Advisor, Consortium of Indian Farmers Association

Farmers are provided subsidised fertilizers, MSP, procurement assurance, crop insurance, drought and flood relief, concessional credit and loan waiver. They are not charged for water, electricity, or mid-day meals. The organized sectors pay income tax, corporate taxes, services taxes, entertainment tax, whereas, there is no tax on farmers.

So why are the farmers throwing milk and vegetables on the roads? What are they angry about? Are the generous doles by leaders not sufficient?

The fact is, these programs and concessions have not provided any permanent solution. MSP is a myth, as are crop insurance, procurement extension and cheap inputs.

Dr. M. S. Swminathan’s 2006 report was kept in cold storage by the UPA government for eight years. Prime Minister Narendra Modi’s 2014 election promise of giving MSP of “production cost plus 50 per cent” has not been implemented. The NDA government incentivised production of pulse and oil seeds, but also imported huge quantities, leading to a crash in prices. In 2014 the government also told the states – like Madhya Pradesh and Chhattisgarh – not to announce a bonus over and above the MSP for rice and wheat. Modi announced a loan waiver in UP for the election, but his finance minister Arun Jaitley disagrees.

The agitating farmers will be asking leaders, administrators, urban professionals why farmers are deprived of economic equity like in organized sectors. Why is it that technology, investment and reforms that are encouraged in service and industrial sectors are not allowed in the farming sector? People living in glass houses better be prepared for many discomforting questions.

The real question is how do we keep food inflation in check without hurting farmers? — Sajjid Chinoy, Chief India Economist at J.P. Morgan

The sharp and sustained disinflation India has witnessed over the last three years – despite two successive droughts – is perhaps the most stark manifestation of the restoration of macroeconomic stability in India. As history has repeatedly demonstrated, macroeconomic stability is the foundation for growth to prosper. Growth, in turn, is the best antidote to fighting poverty, as India has witnessed over the last two decades.

Food inflation has fallen even more dramatically than core (non-food, non-fuel) over the last three years’ inflation despite the successive droughts. This is likely having a salutary impact on expectations, which are unambiguously good.

There are, however, two sides to every story. The sustained fall in food inflation over the last two years – even more than core inflation – has meant that the terms-of-trade have turned against agriculture. This, in conjunction with successive droughts, have contributed to some stress in the rural and agricultural sector – reflected in the grinding down of rural wages over the last few years.

So the real question is: how do we keep food inflation in check without hurting farmers? There is only one way to square that circle – improved productivity in the agriculture sector. We need to double down on investments in agricultural infrastructure to boost yields and improve the supply chain from the farm to fork. These are critical prerequisites to boost productivity, reduce per-unit costs, and thereby ensure that farmer’s real income is protected, even as prices remain contained.

This is the only way out. Else we will be constantly facing the zero-sum game: trying to choose between macro-economic stability and safeguarding the agricultural sector.

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