Moneycontrol
Last Updated : Mar 14, 2018 11:34 AM IST | Source: Moneycontrol.com

Short-term solutions like MSP, farm loan waiver will not put an end to farmers' income woes

Maharashtra has a lopsided allocation of resources that favors certain crops and orphans others, which further aggravates the issue of farmers' incomes.

Ruchi Agrawal @ruchiagrawal

Burdened with heavy debt due to crop damage and in a bid to protest against unfulfilled promises, Maharashtra farmers undertook a massive protest march to Mumbai that ended last night with the state government agreeing to most of their demands and assuring a six month timeline for proper implementation.

The implementation of the demands includes complete farm loan waiver, higher support prices, etc. While this would provide immediate respite to the anguished farmers, the question is can it ensure longer-term farm income stability?

A piecemeal approach in handling the agrarian distress can only ensure political mileage. In order to transform Indian agriculture to an engine of growth and ensure doubling of farm income by 2022, holistic reform is warranted.

Improvement in farm productivity and average land holding, prevention of wastage in the value chain, production of high value-added crops and creation of more non-agricultural employment in rural areas is the need of the hour.

Short term solutions can provide temporary respite while spoiling the credit discipline, as was evident post the spate of loan waivers last year. For companies dependent on agriculture and rural economy, a more structural long-term solution can only improve fortunes.

What went wrong?

In three of the last four years, agriculture has seen a negative growth in Maharashtra, a state with a mere 19 percent land under irrigation and major dependence on the weather and monsoons to irrigate fields. Untimely and scattered rains, along with hail storms and pest attacks, have successively damaged crops, leaving little room for recovery. This has hit farmers’ incomes immensely, impacting not only their ability to pay off loans but shrinking their basic disposable income.

Not only this, Maharashtra has a lopsided allocation of resources that favors certain crops and orphans others, which further aggravates the issue. Frequent intervention in the form of support prices or for resource allocation, many a time to gain political mileage, has disturbed the equilibrium within crops. The disparity between area and output is clearly visible.

farm fury

The farmers side:

After successive crop damages, the farmers had been assured benefits and support from the government. However, the implementation of these promises has been delayed, which pushed farmers to borrow from exploitative moneylenders and other resort to other desperate measures.

What delayed the payments?

The disbursal of the farm loan waivers announced by the state last year was delayed majorly on account of verification of the beneficiaries after anomalies were found with Aadhar numbers submitted in applications.

Key demands from farmers:

The farmers came with a clear cut set of demands, which includes:

• Complete farm loan waiver
• Implementation of the Swaminathan Aayog suggestion, especially the MSP (minimum support price) to be 1.5x of input costs
• Speedy compensation of losses to farms due to crop damages in hail storms and pest attacks
• Land ownership over forest land under cultivation of tribal farmers.
• Pension scheme for farmers
• Changes in river linking scheme

• Enhance water availability in drought prone districts

The economic angle:

The damage to the state’s major crops like onion and cotton due to hail storms, pest attacks and uneven monsoons during the year are expected to contract the state’s agricultural output by almost 8.3 percent. This in turn would slow down the overall GPD growth of the state, which is expected to come in at around 7.3 percent, the lowest in three years.

The political angle:

In the crucial run up to the 2019 Lok Sabha elections, no political party wants to be perceived as anti-farmer. Many argue that the entire protest was much of a political play with each side portraying support for farmers.

However true these might be, the fact that farmer incomes are grossly below the minimum cannot be denied and immediate steps to ensure both shorter and longer-term farm income stability is a dire need of the hour.

The benefits:

The implementation of the demands would definitely bring in some respite for farmers. It would also help in removal of the drain from farmers' incomes (loan repayments) which would help in assuring that the benefits of forthcoming reforms reach and stay with farmers.

However, delay in comprehensive reforms would only push farmers again into the vicious cycle of loans, moneylenders and interest payments.

The challenges:

The loan waiver for farmers will cost the state almost Rs 34,000 crore, which will definitely have a huge impact on the state's treasury. Funding the waiver would entail cutting down other forms of investment like infrastructure.

Loan waiver per se creates the classic ‘moral hazard’ problem (moral hazard occurs when someone increases their exposure to risk when insured) leading to a rise in delinquency of the entire agricultural portfolio of lenders.

Moreover, there seems to be no guarantee that the farmers will not end up in a similar situation again, two or three years down the line.

The formula and implementation of the minimum support prices seems messy and stands to intrude the demand supply equilibrium. With frequent interventions, free market forces are obstructed, which prohibits free adjustment of production and crop choice.

Due to this, the farmer tends to remain sticky to crops where either the MSP is high or where crop has a better resource allocation. This would result in continued overproduction of certain crops (much beyond demand) and lingering scarcity of certain others as the switch between crops is hindered.

Doubling of farm incomes – far fetched

The government has time and again reiterated the vision of doubling farm incomes by 2022. Even after rosy estimates, agricultural growth is lagging at around 2 percent for the year and the target of doubling the real sustainable farm incomes requires almost a 13 percent growth in the coming years, which is a huge way off the current growth path.

With 47 percent of the workforce employed in agriculture, improving agriculture incomes has the maximum potential for eliminating poverty in the country. Mere loan waivers and MSP intrusions are one-time support and do not improve the sustainable income flow for farmers.

Improving agricultural incomes and reducing rural distress would require rapid and comprehensive steps, including farm mechanization, leading to higher productivity, provision of proper storage facilities for harvest, increasing penetration of irrigation to reduce dependency on weather, encouraging and stimulating the food processing industry, improving rural logistics, promoting crop insurance, non-farm income, etc.

For more research articles, visit our Moneycontrol Research Page.

First Published on Mar 13, 2018 04:28 pm
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