The way political parties announce loan waiving schemes before elections; it is definitely going to devastate the discipline of political economics in India. After 10 years of first loan waiving announcement by the UPA I Government, we should evaluate the gain and loss of loan waving scheme. No doubt it benefits the party announcing loan waiving to attract farmers’ votes in election. But, has it helped the farmers raise their living of standard? The incidences of farmers’ suicides motivate political parties to announce loan waving schemes. But has the loan waiving schemes helped stop the incidents of suicides? No. Then there is need to access the cost benefit analysis of loan waving schemes.
The cost of loan waving scheme is not just the announced loan waiving amount but it goes beyond that. These schemes cause huge damages to mechanism of credit dispensation from formal sector and also to the sought recovery culture for healthy financial growth.
Due to trend of loan waives often the borrower who has no intention of defaulting, despite possessing resources to repay, tends to delay or avoid repayment with hope of loan waiving announcement. Farmers earnestly discharging their liabilities towards financier feel cheated when they hear about loan waiving schemes. As a result, the formal financial sectors tend to restraining disbursement of credit to the farmers.
So loan waiving just does not affect the lender, and farmers, but is also risky for food security as it may create shortage of finance and lack of confidence for investors in agriculture sector. The worst is that the ultimate burden has to be borne by the tax payers. The Government could have planned in advance to redress the situation by allocating sufficient funds to agriculture sector instead of allowing the farmers’ distress to rise and then spread loan waiving scheme.
This practice of announcing loan waiving should not be allowed to continue as it is not good for the financial sector, agriculture sector and for the fiscal consolidation of India. There is urgent need that the Government and political parties should come up with long term solution for farmers’ distress. There seems overdose of painkillers. Now we must start providing proper drugs to finally cure the economic diseases of farmers so that there could be no need for painkillers in the future.
Otherwise also agriculture still remains the most important sector to provide employment for most of Indian workers. So, if Indian population has to be well off, Indian agriculture has to be improvised by removing the hindrances and opening the gateway for growth.
Indian agriculture suffers from low productivity compared with advanced economies. There is need to improve the productivity by improving the irrigation system, art of cultivation and quality of seed and fertilizer. There is huge need of investments to improve the irrigation facilities in India. Out of 160 million hectares (mha) of actual crop area, only 58 mha is being irrigated; others still remain rain-fed. Out of total irrigated land 67 per cent irrigation is covered by groundwater through borewells and 33 per cent by canals. India really needs to attract more of public and private investments to improve basic irrigation system to help the farmers of rain fed areas. This can be done if the Government holds Panchayats responsible for development of irrigation and manage it through lease schemes.
The other major contributor to rural distress is the unremunerated price of agricultural produces. The Swaminathan Committee classified the agricultural costs into three categories namely A2, A2+FL and C2. While A2 is constituted of actual expenses in cash and kind on inputs like seeds, irrigation, pesticides, fertilizers, and wages to hired labour and others, A2+FL comprises A2 plus the notional cost of unpaid family labour.
The most comprehensive cost estimate C2 includes interest on loans, rentals for owned and rented land, fixed capital costs in addition to A2+FL. In the current system, CACP arrives at MSP by adding 50 per cent to A2 which does not fully reimburse a remunerative return to the farmer. The demand is for fixing MSP at C2 plus 50 per cent which is apparently justified and will go a long way in addressing rural distress.
Statutorily imposed marketing rigidities in agricultural commodities and other farm produce erect another impediment in the growth of rural sectors by denying any exchange between the farmer and ultimate consumer. Direct buying from the farmer by the traders, processors or exporters is also prohibited. To the complete exclusion of private intermediates, only state governments can establish agriculture markets which are overwhelmingly controlled by licensed commission agents with strong political backing. As a result both the producers and consumers are disadvantaged. The producers do not get the sought price and the consumers need to buy out at higher prices.
Essential Commodities Act 1955 also needs a re-look as restrictions under its aegis imposed on the holding of agricultural commodities are detrimental to the rural farming community. Of course, balancing of consumers’ interests will need to be done carefully. Likewise, import and export controls require to be regulated with extreme caution e.g. current controls on onion exports is not justified when there is a glut in domestic market leading to the suppression of prices to an abysmally low level and ruling overseas prices are way higher.
In addition to the yield risk that insurance may cover, what matters to farmers is the revenue they get by selling their produce and if price crashes, the income may fall even if yield is fine. These challenges can be tackled if we plan for future buffer stocks and accordingly offer advance purchase to farmers at given price for specified quality and quantity of particular produces. The financial mechanisms for this could be commodity derivatives – futures and options.
Another option could be leasing out of capital invested in these farms for longer periods because for poor and marginalised farmers, the lower capital investments in their farms is basic reason for lower productivity and inability to mitigate weather risks. If poor and marginalised farmers are provided with capital support in terms of polyhouse infrastructures on lease terms, it will help them enhance productivity of better quality produces along with mitigating weather risks.
Our political leaders also need to recognise that the banking system cannot continue to finance farmers even as agriculture is inherently becoming unviable. The present solution of declaring loan waivers is unsustainable and it also destroys credit discipline by borrowers, while bankers get increasingly wary of lending to farmers and agriculture in view of political risks. It ultimately penalises common people (who pays direct and indirect taxes) to recover added fiscal deficits due to more loan waiving announcements. Moreover, there is no need to offer subsidies to the farmers who hold larger size of lands and annually earn relatively higher income than poor farmers. There are cooperative kings who are misusing the subsidy schemes floated on the name of poor farmers.
Let us now turn to the need for investment finance for diversification within agriculture from crop cultivation to allied activities such as horticulture, floriculture, dairy, poultry and fishery. Out of about 48 crore workforce in 2011, about 55% or 26.3 crore persons were engaged in agriculture in 2011. Of these, 11.9 crore were cultivators and 14.4 crore were agricultural labourers. In our view, roughly half of them, about 13 crore, need to be helped to move out of agriculture. (We are lucky that two-thirds of them are youth and therefore they are trainable, they have aspirations, they are mobile which aligns with this goal). Those who stay back should be helped to diversify from pure crop cultivation to allied activities.
A good initiative taken by the UPA Government was launching scheme to promote Farmers Producers Organisations (FPOs) by sanctioning matching equity grant to them. There had been much other work to follow up. But somehow that work could not start.
FPOs, if handled and nurtured properly, can help reduce the distress of our farmers and can make a sustainable long term change in their lives and at the same time can bring business opportunities for primary producers, especially small farmers who are more vulnerable to the current market and environmental situations. Farmers need to participate in the full value chain to benefit from agriculture and they need to be aggregated into large numbers, to be able to own parts of the value chain.
The Government should try encouraging the FPOs establish their own godowns to hold their produces for optimal utilisation via value chain process. They should also be encouraged to establish and run agro processing industries so that their produces may be processed therein to provide them with better yield compared to selling their produces at distress prices during harvest season.
It is expected that farmers’ income will genuinely increase with opening up of more agro processing industries under management of FPOs, and linking them with genuine marketing networks / agencies. This will also provide more employment opportunities for non-agricultural workers in rural India to restrict migration of labours from rural to urban areas.
[The writer is Director-Alternative Finance, TFS Group India, Mumbai. Email – [email protected]]