The news of farm loan waiver is not just a hot topic but a very important issue facing the nation. The most key issue is what is the impact of this on state budgets and in turn interest rate policy, the impact on lenders, borrowers and the farm economy?
To answer all the above questions, CNBC-TV18 spoke to Dr Ashok Gulati, Former Chairman, Agri Prices Commission, Dr Abhijit Sen, Former Adviser, Agriculture in the Planning Commission and Neelkanth Mishra, Head of Equity Strategy, Credit Suisse.
Gulati believes in the next few months this farm loan waiver issue is going to be a contagion which other states will also have to follow. The seed of this was sown by Prime Minister Modi during UP elections, when he announced waiver if they were elected to power in the state.
According to Gulati, although the seed of this epidemic is in political opportunism, the other part is that rural India is in distress due to collapse in food prices despite bumper harvest. Incomes not rising despite good rains.
Farm Crisis: Why Bumper Harvests Are Becoming Painful For Indian Farmers
Sen says political promises during UP election was the main trigger. Besides that, the agriculture market which was in turmoil due to poor food prices despite good rains where further impacted by demonetisation. Agri market is largely a cash market.
Mishra believe distress in food prices will continue. Food prices did not rise even during the drought period, so this trend of lower food prices should have been anticipated, says Mishra.
According to Mishra, with India’s population growth slowing, the demand for food is also not rising.
Below is the transcript of the discussion.
Q: What do you think is the wellspring of this farm loan demand, is it just the immediate trigger from UP and that becoming a political contagion or is there something in the form of a new political order that has come and hence that is triggering some changes?
Gulati: You can say it is a mix of 2-3 things. One, the seed of this was sown when the Prime Minister himself in the UP election announced that if they are voted to power, they will waive off the farm loans in the very first cabinet meeting of UP. Other farmers are watching. In fact UP farmers are not as worse off because they have an irrigation ratio cover of about 70 percent plus. Other states which are in a much bigger distress I would say those farmers are also watching. So, what is so special about UP farmers that other farmers should not get? So, it led to a demand in Maharashtra and now next in the queue is Punjab and Haryana very soon. It may also spread to Rajasthan or others. So, that is political part of it.
The other part is the distress, a onion price crash can trigger a massive protest. So, it is like, a shout in the mountain can start an avalanche. So, it is that type of story. If the conditions in the rural areas are not very good because of the price collapse and despite bumper harvest then all these things get mixed into it.
Q: Is there any other trigger in terms of the crash in food prices separate from the farm loan waivers if we looked at the way in which food prices have fallen. Not only have they fallen continuously since probably last August, there has been a particularly inexplicable fall in the last two months. May and June we have got negative number in CPI and in WPI. So, if you can explain why that happened?
Sen: It is in part a good monsoon, production levels went up from a base which was very low because of two bad droughts in the two previous years and you had a situation in which both the consumer demand and much more importantly the ability of the market to actually function in a normal manner was considerably weakened by demonetisation. Don't forget that almost all agricultural markets are cash markets and any shortage of cash would show up in lower prices.
I am not particularly surprised by the fact that, that is the way the market has reacted given the good monsoon and given the background of demonetisation.
Farmers have a huge amount of legitimacy in saying something must be done, we have had two bad years of monsoon, something has to be done about these very bad prices in a good monsoon. So, we are actually no better off with the monsoon being better.
However the real trigger for this is Prime Minister Modi's announcement in the UP elections that we are going to give a loan write off here. We need not have taken the demand of farmers, need not have taken the form of loan waivers. It has taken the form of loan waivers because you said we will do it and if you do it in one place you have to do it in many.
Q: The kind of across the board fall and sustained fall that we have seen in food prices across cereals, pulses, vegetables in the past 10-12 months is something I have not witnessed. So, are we seeing something different this time around?
Gulati: You said pulses and pulses is a very classic case of what is happening. Just a year back prices were zooming through the roof and consumers were crying, Rs 180 per kg was toor daal price in the retail market, farmer was getting wholesale price of Rs 110-120 per kg. Now every farmer starts going in the next season to grow that, toor daal production goes up by more than 50 percent and you have a market situation which is totally strangulated because you have banned exports, you have banned private sector stocks, you banned futures trading in that. So, the policy environment was to deal with the drought situation and now you have a bumper harvest and you still have the same policy environment. So, prices go below the MSP. MSP was Rs 5000 per quintal, prices were ruling at Rs 4000 per quintal. So, the policy doesn't change that quickly. By the time policy makers awake the damage has been done.
On top of this global prices are very much softened. Your crude price has brought freight cost down, global outputs of cereals are at record high, so global prices are down so you cannot export many of the things. Perishable is a separate story because you don't have enough storage capacity in the country. If you don't have linkages with the processing industry properly, this is a typical thing and every third year you will see this. It has happened in the past, it will happen in the future unless you clean up the marketing structure.
I don't know how much is the impact of demonetisation in this because the worst phase of demonetisation is over. Liquidity is back in the system. If they could manage at that time when they were sowing, when harvesting was happening and all those things, that was the period when they were supposed to be affected most but I am not sure on this.
Q: But separately, I just want to get this point finally out of the way. Is this just a combination of circumstances that has led to a fall in food prices in every conceivable item or are we into something different now? For instance, are we into a cascading improved yields and therefore, is this is a sustainable fall in prices? Is this a different political management as well? The Agricultural Produce Market Committee (APMC) Act has been abolished in some states and probably the erstwhile ruling regime which is what some political scientists say had some of the marketers, some of the middle men in their clutches or like for instance, the NCP and they could push up prices, now they are no longer in power. Is there something sustainable in the food fall or is it just a combination of circumstances as Dr Gulati is saying?
Sen: Sustainability is not about markets. Sustainability is about what is happening to production, it is not growing much faster, if anything it is growing slower. Sustainability is also about consumer demand. That is not running away from food although people might not be able to buy it if they have not got enough money. So these are the sustainable issues. It is the short-run issues which are market led.
And you are right. The markets, agricultural markets at the moment are in turmoil. Partly for the reasons that you said that there are monopolies which have particular types of connections, some political connections might be running dry. But this is also where whatever Ashok thinks on this matter where demonetisation has hurt. These markets are essentially cash markets and the working capital available to them takes a long time to build up. There may be cash back in circulation, but I do not know especially given the political circumstances and the political connections that you are talking about whether or not everything is hunky dory in the way that market works which is not always perfectly legal.
But, the consequence of that would be lower stock keeping ability, lower ability to buy, lower presence in the markets, these are the short-run issues, these are not sustainability issues and I make that distinction for a very simple reason. For the rest of the economy, that is not the farmers, you are going around talking about inflation rates have come down, let us have a cut in the interest rates. That is the basic message. That is to do with sustainability. That has nothing to do with the short-run market conditions. Now if you want to do a short-run market condition, prices falling, let us cut interest rates, you are actually leading into a situation which is the opposite of a bubble.
Q: So what you are saying is that the RBI would be right in assuming that this is a transient fall in food prices and they cannot at all be sure that this is something that can be sustained? Right?
Sen: I hope that is the view that they take because that would be the correct view and you have to be absolutely sure about the money market returning to normal, about trade volumes returning back to normal and that is simply not cash in circulation.
Q: What is your analysis of the fall in food prices? One, the causes and two, do you see it as something that can continue?
Mishra: I think it can continue. I think the warning signals were available even during the years of drought. If you recall, food prices had not risen very sharply despite two consecutive years of drought. In fact, the decline in consumer price index (CPI) inflation and food inflation had started well during the drought. So despite volumes being low, we were not seeing prices go up so much and that is why, I think it should have been anticipated.
I had started flagging this in May, last year that there is something structural which has changed. We are seeing food demand, people say it is only about cereals, but cereals are 51 percent of our gross cropped area. So if people shift even 2-3 percent out of that to anything else, you are talking about big over supply emerging everywhere. And things like milk, I do not think there is any minimum support price (MSP) or any such cycle. So the decline is very much structural, we have for a long time, through policy sustained too many people in agriculture.
The first time someone flagged it was 1880 that India has man to land ratio at that of Britian. Even now we have 100 times as many people in agriculture as Americans have. Our food demand, because population growth is now less than 1 percent a year. Per capita calorie demand, it does not grow that fast, actually does not grow at all.
Therefore, aggregate food demand is not – I mean you can talk about pulses and oilseeds and there are pockets where we need to do a lot more and provide cheaper calories, but otherwise, we do not need much food and therefore, unless government pushes a lot more unproductive capital into that side of the economy which was a practice for the last 70 years, you will not see food prices go up and therefore, there will be farm distress.
Q: What is your sense? Are we going to see a jump in fiscal deficits first and therefore an impact on the interest rate policy?
Gulati: At present it is very clear that loan waiver is not going to remain restricted to one state or two states and this is going to spread. And whether it will spread to five states or seven states or 20 states, we do not know. My hunch, very crude hunch is that if you already count what Andhra did and Telangana did and after that Uttar Pradesh and Maharashtra and now, Punjab and very soon, hopefully, even in Haryana and other states, you will have a bill of around Rs 2,00,000 crore as loan waiver.
Now, if that is settled within a year, definitely it will show up in the deficit of the states and that is going to derail much of the fiscal discipline. This time, centre would say we are keeping our fiscal discipline. It is the states who are derailing. But at the end of the round, it is the economy that has to bear the brunt.
Q: Actually we just spoke with Punjab Finance Minister and he expects it to be waived off over the tenure of the government. So he is looking at 4-5 years and his bill is, according to the first estimates, Rs 10,000 crore. So do you still think that deficits can go seriously awry?
Gulati: Do you think farmers are going to wait for five years to get their loan waiver?
Q: I think he is going to write it off now, but he will pay the banks over five years, it seems to be.
Gulati: Same thing UP is saying, we will adjust it over a five year period through bonds and so on and so forth. So the question is whether the entire fiscal deficit is adjusted in this year or over a five year period, fine that is good enough to do that. But despite all this, the message in the system that will go is very clear that India is not very strong and India is not capable of managing its fiscal deficit. That message will very much go.
Now the desirability or not desirability is a separate issue. And still the big issue of non-performing assets (NPA) is on the table, so we will have to see how the things evolve.
Q: On the same issue, do you see state budgets, state deficits going up? In a previous report, you had written that state governments usually deliver on their deficits. They may not even pay their school teachers, but they do usually deliver on their deficit numbers.
Mishra: What we saw, to quantify the numbers, there is about eight states that this is in discourse. So we have seen UP, Maharashtra, Punjab already do it and then there is Haryana and Rajasthan and Madhya Pradesh, Gujarat also and Karnataka. So the point is that these states together are about 62 percent of outstanding agricultural loans for the scheduled commercial banks and if you assume a write down of about 30-31 percent, what you UP and Maharashtra had done was about 30-31 percent of the scheduled commercial bank loans was the quantum given.
What Punjab at Rs 10,000 crore has done is actually 16 percent. So their outstanding agri loans were Rs 62,000 crore, they have written down Rs 10,000 crore. So it is actually lower than Rs 2,00,000 crore of the aggregate number that we had earlier estimated. What Punjab is doing is exactly what Telangana did, exactly what Andhra did, exactly what Tamil Nadu did with the Cooperative Bank loan waivers they did over the last 3-4 years. They spread it out over many years. I think Dr Gulati's concern is valid.
Farmers will not wait and it takes a long time, while top down, you can have five people sit together and say fine, this is what we are doing, but to actually go down and identify which farmer gets it, is it crop specific, is it the tenant, is it the owner of the land, does the irrigated crop land get less or more, all of those decisions once they are taken, it takes many months if not quarters, and then one by one you start picking out. And the eventual waiver that we saw in 2008 waivers was actually 27 percent lower than the Rs 72,000 crore that was announced.
So the fiscal impact in one year, could be maybe Rs 25,000-30,000 crore. That is like 0.15 percent of GDP. This year, we are going to have a GDP of Rs 168 trillion. It is about 0.15 percent which is a meaningful number. It is a lot of wealth, but it is not enough to derail the rate cutting episode. But yes, till we have seen all states go through and decide how they are spacing it out, RBI may have some caution.
Q: The final piece of this. How does this impact the farm economy? Immediately will there be fewer loans given because of fear that this culture of non-repayment will catch on or does it mean that there is better farming? How does the entire complex of farm economy get impacted by loan waivers?
Sen: Not much in the short-run because it can have both types of effects. One of the things, I am not necessarily saying about the present situation, but certainly in the 2008 situation, there were a lot of clogged loans. People who could not get loans because they had not repaid their past loans. Once that clogging gets over, actually the credit flows might actually increase. That is the opposite of what most people believe, but that can happen. If so, the impact on the farm economy should be positive.
My own assessment at the moment is farm waivers will have no impact on the output. It will obviously have some impact on people's welfares. Unfortunately, the way loan waivers are usually given is the relatively rich who do better out of it than the relatively poor. So even on the welfare side, there is a question mark.
But let me come back to something which the previous speaker was talking about. It could be the fiscal deficit of states, but if it is not, it is the state of the banks and the state of the banks is probably something which is, at the moment, worse than the fiscal deficit of the states. So if you are going to give out the money and expect to pay the banks over the next five years, you are just putting more stress into the banks. Again warning to RBI, do not get carried away by the low price situation. Look at the banking structure and its strength rather than anything else.
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