Photo: Mint
Photo: Mint

Opinion | The political economy of the persistent agrarian crisis

Loan waivers and the promise to raise MSP cannot solve the problem

The victory of Congress party in the recent assembly elections of Chhattisgarh, Madhya Pradesh and Rajasthan has brought the agrarian crisis in rural areas to the centre of political debate. While there are several factors in election victories, the severity of the agrarian unrest was surely a major factor. While there is consensus that the incumbent Bharatiya Janata Party (BJP) has been indifferent to the agrarian crisis and in some ways even contributed to it, there are no easy solutions to the crisis. Even the victorious Congress party has also gone back to the same old formula of loan waivers and the promise to raise the minimum support price (MSP) of crops to win back the trust of the farming community.

Both prescriptions are old and have been tried by every party, including the BJP in the state elections of Uttar Pradesh and elsewhere. But can loan waivers and MSP increases reduce the severity of the agrarian crisis let alone provide a long-term solution? The answer is a clear no. Not only are these inadequate and do not address the real issues but also create disincentives which are detrimental to the long run prospects of agrarian revival. Apart from being iniquitous benefiting only the institutional borrowers and surplus farmers, both of these are large drains on the financial resources of both states and the centre with the negative fallout of a decline in investment in agriculture. This has been the case at the central level with agricultural investments declining in real terms during the tenure of this government and also in most states that implemented loan waivers.

But they also detract attention from the core issues that plague Indian agriculture. The debt trap is only a symptom of a larger crisis of declining farm incomes driven by a large decline in crop output prices even though input prices have risen. This has happened in food crops but also in non-food crops. The movement of terms of trade against agriculture in the last four years has only worsened in recent years. So much so that the aggregate food inflation from the Wholesale Price Index (WPI) is negative for the last five months. It is important to note that the WPI data underestimates the severity of price decline since what matters to farmers are farm harvest prices that are even lower than wholesale prices.

The real question is why agricultural prices are declining when there is no such trend visible in international markets. Arguments suggesting that price decline is due to surplus production are not just simplistic but are also naïve in a country where starvation deaths and malnutrition continue to make headlines. While there are a combination of factors, including unnecessary imports, market restrictions and oversupply in some commodities, it is also a result of severe demand deflation in the economy, particularly the rural economy.

The inconvenient truth about the decline in agricultural product prices is also the larger political economy that emphasizes lower inflation over everything else. And this is achieved by suppressing food prices since these are seen as a major cause of inflation. While the evidence in this regard suggests no correlation between food inflation and core inflation, including in recent months where both have diverged, it also shows monetary policy has a limited role in explaining food inflation.
Still, the mantra of low food inflation and thereby overall inflation is something that is stressed by rating agencies and foreign institutional investors as they seek to maintain the real value of their assets in developing countries. Any deviation from this is punished in the form of a ratings downgrade and the fear of a fiscal deficit.

But what it implicitly does is punish farmers at the cost of subsidising the middle class and financial institutions. The problem of low prices in agriculture is essentially part of a larger political economy architecture that uses the agricultural sector as the bargain sector. It is part of the gamut of deflationary policies successive governments have followed after the 1990s. Such a policy prescription of deflationary policies such as credit constraint and contractionary fiscal policies leading to decline in government expenditure is also responsible for the job crisis the country faces despite better than average growth of the gross domestic product.

By now it is obvious the rural areas are in deep crisis with demand collapsing to its lowest. Real wages continue to decline in real terms, incomes of farmers have declined due to rising input costs and declining crop prices. With demonetization and the rolling out of the goods and services tax further eroding the capacity of the unorganized sector to absorb labour and create demand, the rural economy has come to a virtual halt. The fact that these have happened precisely at a time when agricultural production has reached record levels and growth rates are rising also implies that the problem is one of the model of economic growth that the country is following. Unless governments realize that the current crisis is a result of the flawed political economic structure which penalises farmers to serve the interests of the middle class and financial markets, agrarian crisis is unlikely to go away.

Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi.

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