Forgoing agricultural loans is not only bad for the economy, but also harmful to the interests of the farmer

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By Ram Singh

Farmers, from Punjab in the north to Tamil Nadu in the south, have started demonstrating to demand the cancellation of agricultural loans. The governments of Uttar Pradesh and Maharashtra have already considered it politically expedient to deregister them. Some other states may follow suit. However, such decisions are as wrong as they are misleading.

Nonetheless, it will be a mistake to treat the unrest as a domino effect of the UP government’s decision to forgo loans worth Rs 36,359 crore. It is the manifestation of an agrarian crisis that has been looming for several years.

After two years of drought in Maharashtra and several other parts of the country, last year’s monsoon was normal. Farmers responded to the rain and official announcements by increasing plantings of lentils, oilseeds and coarse grains, which were traditionally scarce. However, governments have failed to keep their end of the bargain. Neither the purchasing facilities nor the remunerative prices were provided as promised.

In addition, due to the cyclical nature of global food prices, imports have become cheap. As a result, the wholesale prices for lenses have dropped significantly. For example, the price of tur has fallen from Rs 110 per kg in 2015 to less than Rs 40 per kg in 2016. Fruit and vegetable prices in Mandi have collapsed following demonetization.

Farmers could not sell tomatoes even at Rs 1 per kg. More recently, the abundant production of onions and potatoes has literally exploded their prices. All of this had a dampening effect on the Consumer Price Index (CPI), although the gains for the consumer were modest due to the large number of middlemen and waste.

Agricultural inputs
In contrast, the prices of agricultural inputs have risen sharply. Official estimates reported in this document (“Farmers are not ready to lend only,” goo.gl/iWiqZu, June 10) suggest that for many widely grown crops, farmers suffer substantial losses. In Madhya Pradesh, wheat yielded a meager profit of only 2% while paddy inflicted a loss of 15%.

These figures are not surprising. Over the past three years, the Minimum Support Prices (MSP) for most crops have increased negligibly, especially compared to the previous three years (see table). The combination of high costs and low PSM has eroded the viability of agriculture.

An ongoing study shows that in Haryana the average rent (asking price on leased land) has decreased from around Rs 37,000 per acre per year in 2014 to Rs 24,000 this year. The vagaries of the weather and the volatility of paddy prices worsened the situation. Many panchayats have failed to lease their land, even after several attempts. The agricultural crisis has disrupted the entire rural economy. However, forgetting agricultural loans is not only bad for the economy, but also harms the long-term interests of the farmer.

It even induces debtors capable of repaying defaulted loans. Unsurprisingly, the recent waiver announced by the government of Maharashtra is expected to cost Rs 30,500 crore, nearly four times the loans canceled in the government’s 2008-09 PAU program. Giving up agricultural loans was a bad decision then. It’s a bad idea even now.

Like the 2008-09 program, the last cycle cannot improve conditions for farmers. However, it will eat away at investments in infrastructure and public goods.

Provide credit
If the Center is serious about doubling agricultural income, it should focus on increasing the availability of institutional credit in rural areas. According to the latest data from the RBI, the average value of loans advanced by commercial banks programmed in rural areas is only Rs 1.28 lakh per borrower. The average credit granted to small borrowers (small marginal farmers, artisans, etc.) is only 49,681 rupees.

According to recent reports, the growth rate of loans to agriculture has fallen to 2.5%. In such a scenario, small and marginal farmers are forced to raise 40-60% of their debt from non-institutional lenders at usurious rates. Saving them from the clutches of the lender should be a high priority. Since most farmers now have bank accounts, such a goal is achievable. Agriculture can only become viable by supplementing it with activities such as animal husbandry.

In addition, the Pradhan Mantri Fasal Bima Yojana (Crop Insurance Scheme) is expected to extend insurance coverage to partially damaged crops. It should target the farm household level and extend the time horizon of coverage up to five years to cover both normal and bad years. In addition, there is a need to increase the productivity of agriculture by improving irrigation facilities, water harvesting and soil conservation technologies.

Finally, it is just as important to protect the interests of consumers while making agriculture profitable. This requires amending the Agricultural Commodity Market Committee Act and increasing storage facilities to reduce fruit and vegetable wastage.

These last two questions fall within the domain of States. But the ruling coalition in the Center also leads several key states, which makes it very viable.

(The author is a professor at the Delhi School of Economics)



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