Not Loan Waivers, Not Old Schemes Bottled As New: Here’s What Can Help The Indian Farmer

Posted by Ambar Sharma in Business and Economy
October 22, 2017

With farmers, it’s always more about emotions rather than an adherence to procedure. With such a heavily protected industry, one that was left untouched even after the post-1991 liberalisation extravaganza which got us out of the mess of Licence Raj, they have an extremely tough job.  Way back in 2000-01, our policymakers were careful in not opening up the agricultural market too much by charging wheat at 50% and nuts at 100%.

Presently, tariffs are about 10% for wheat and pulses,  partly due to a bumper crop this monsoon since they were zero before. The mindset of protecting the farmers is important not just for food security but emotionally as well. In the Economic Survey of 2016-17, the export performance of agriculture, saw negative growth at (-)17.6 in the last fiscal year and is projected to be (-)3 for this year.

However, domestically, our agricultural growth has been growing from strength to strength. In the GDP growth for January-March 2017, government spending and agriculture were the two bright spots in an otherwise damp macroeconomic statement. Our ostensible saviour was a good monsoon after two bad ones and overproduction of crops such as kharif food grains which are predicted to be significantly more than last year (up from 124.1 to 135 million tonnes) as well as onion and tomato. To top it off, the sector is expected to grow to 4.1% from 1.2%, plus, the MSP (Minimum Support Price) has grown for all kharif and rabi crops on the recommendations of the Commission for Agricultural Costs and Prices (CACP) and it seems to be the one good sector in our economy.

Then, why are the farmers protesting?

The obvious reason seems to be that due to basic economics – overproduction leads to falling prices. Simple. What this does not account for, however, is that farmers are throwing their perishable goods such as vegetables and milk out on the streets. It seems to be because post-harvest crop loss is a problem which points to a structural defect starting with not having enough cold storage and warehousing facilities for farmers. These same phrases have been oft-repeated for an inordinate amount of time without anything adequate being done. These need to be done immediately even though their effects will be seen in the long-term. For now, one problem lies in crop insurance. 

The Pradhan Mantri Bima Fasal Yojana (PMBFY) was sold politically as a principally reformist policy, except as the BJP’s own ally, the Shiromani Akali Dal’s Prakash Singh Badal observed the policy had several problems. The most important of which was that the crop will only be insured if the whole village would pay the premium was a clear example of miscalculation.

Another one that I, along with many others had noticed was the lack of insurance coverage for a lot of risks such as destruction by wild animals, theft, nuclear risks etc. Has the Government never noticed that untamed animals might cause destruction of crops?

On reading the policy, it is clear that the PMBFY is a rehash of old insurance schemes. One, it holds the same approach to area calculation as the National Agricultural Insurance Scheme (NAIS) did with an ‘Area Approach’. Area Approach is basically a state notifying an area (mostly village or panchayat level) which then comes under the scheme’s risk coverage. This is known as the ‘Unit of Insurance’. This should be done at the individual level. Even if you assume that all farmers in a village are reasonably facing the same risk, earning the same average income on their crops or incur the same expenses on production of crops, the farmer is eligible for risks only if the entire village is affected in some way by the calamity. The scheme mentions that localised calamities or post-harvest losses mean the assessment shall be done on an individual level. Good, but it needs to be extended to all calamities.

On the subject of extension, the unit of insurance for only major crops is at the village level, that is, for minor crops the unit of insurance is larger. This should be shortened immediately. Also, only notified crops are covered. This is principally wrong. There should be universality in the scheme’s nature.

Loan Waivers: Hiding The Real Problem

I don’t need to emphasise the burden on honest tax payers accrued by schemes like loan waivers for farmers or the political brownie points being the primary motivation behind them. What I do want to emphasise on is a bigger problem of the informal loan economy that exists within the agricultural sector.

According to a report, 40% of all loans were through informal sources for farmers with less than one hectare of land. As the land area gets bigger, farmers get more formalised loans. They seek banks, and the loans they seek are much longer in period. The small farmers, the ones with 1-4 hectares have a larger share of small-term loans and a larger share of informal loans. This means not only a lack of access to the banking system, but the loan period is usually shorter and the interest rate is higher since the farmer usually gets the loan without putting something up as collateral. A higher interest rate comes back to haunt the farmers once the rains are not adequate enough or natural calamities strike and they do not have insurance.

One solution that this government seems to want to encourage is interest subvention, that is, reducing the rate of interest rather than full waivers which by and large do not work. Debt relief must be transitional rather than abrupt.

The real problem lies when farmers get screwed over by middlemen. Traders with their brutish prices take extremely low prices when there is overproduction of any crops such as tomatoes etc. and do not pass the benefits to the consumers, neither do they do so to the farmers when prices for commodities are high during low production.

The current system of APMCs (Agricultural Produce Market Committees) depends on middlemen to transport the goods to consumers and is heavily imperfect. Here, the middlemen dictate everything. Everyone including companies have to go through the middlemen which creates a situation of distorted prices and corruption. The middlemen need to be eliminated. Although this government has launched a national agricultural market called the e-NAM, it has its own problems in implementation. All states have also not passed the APMC Act of 2003 or framed the rules under the APMC Act for e-NAM. The states need to amend the act to include online price discovery among other things immediately.

Contract Farming: Corporatism In Agriculture Or Improving Standards?

A great way to eliminate the middlemen is via contract farming. The price policy of government for major agricultural commodities must ensure remunerative prices to the farmers to encourage higher investment and to safeguard the interest of consumers. One way to do that is through contract farming which implies that companies have contracts with farmers to produce a certain amount of a certain crop for them. Even though a lot of states (22) engage in contract farming, there is law to regulate it so that farmers do not get exploited by big companies. The government needs to step in and the crux of the potential bill needs to be about making sure that farmer’s working conditions and prices are not taken advantage of by corporates. Having said that though, this is the area where free market enterprise should be accepted more liberally.

A lot of people seem to think that this will corporatise the sector or that it is the government that needs to intervene through policy here. I disagree. Contract farming must remain market-based. This will not only help eliminate the middlemen, but also, since companies like McDonalds want their french fries a certain shape consistently, it would help the farmers work with a variety of crops. It would also improve the technical know-how that would be passed between the companies and the farmers as well as better farming techniques such as irrigation. Make in India also stands to benefit if MNC products are domestically made.

A few reforms also need to be tweaked such as, in total opposition to what I just said, by reducing the number of private players for the Soil Health Card Scheme which is already making the scheme disastrous by employing 10th pass people to assess the quality of the soil. Even the government’s distribution of MSP needs to be improved.

What needs to be done immediately will take time and the things that take time in our agricultural sector need to be done immediately. If the government wants to double the income of the farmers by 2022, only implementing the Swaminathan Commission, will not suffice. It is the grunt work that needs to be done quickly.