Home / Opinion / The farm loan waiver conundrum

Last week, farmers agitating for better prices for their produce of onions and pulses—prices for both of which have witnessed a steep fall in recent months—in Mandsaur district of western Madhya Pradesh turned violent.

Coming in the backdrop of a similar agitation by farmers in the adjoining state of Maharashtra, it puts the spotlight on rural distress and the piquant demand for farm loan waivers.

Given the heightened rhetoric—especially with the issue assuming the polarizing hue of a Bharatiya Janata Party (BJP) versus the other political parties—there is greater attention on farm loan waivers and less on rural distress. This is tragic: because one is a symptom (loan waiver /indebtedness) and the other is the malaise (rural distress).

ALSO READ: Maharashtra announces farm loan waiver, farmers call off protest

Resolving the former without addressing the latter is just kicking the can down the road and playing into the hands of the moral hazard brigade who argue, rightly, against farm loan waivers as they breed the culture of default. The solution, therefore, is complex and not something that can be resolved overnight; it has to factor in the fundamental transformation that Indian agriculture is undergoing.

The fatal flaw of existing public policy is that it continues to mostly view Indian agriculture through the conventional prism—refusing to recognize how the risks have spiked.

Less generously, maybe, it is just deliberate; a status quo will ensure a repeat of the loan waiver cycle, giving the political class an opportunity to distribute patronage among a key electoral segment.

Regardless, the facts as they stand are as follows:

One, Indian agriculture’s share in gross domestic product, or GDP, may have shrunk, but its share in employment is overwhelming. Nearly one in two of the country’s workforce is associated with farm livelihoods.

ALSO READ: We don’t need more Mandsaurs

Second, Indian agriculture is no longer a story of foodgrain. Since the turn of the Millennium, the short-duration horticulture crop story has rapidly taken root; for the fifth consecutive year, its output has exceeded that of foodgrain. Between 2001-02 and 2016-17, horticulture production doubled from 146 million tonnes (mt) to 295 mt, while foodgrain rose from 213 mt to 273 mt.

Third, the new generation of crops do not, unlike key foodgrain such as wheat and rice, enjoy a government-guaranteed support price—which means they are vulnerable to price risks.

Armed with this knowledge, it is obvious that Indian agriculture is fundamentally transformed (A series, Fractured Farms, done by Mint in 2015 captured this phenomenon).

Yes, while it demonstrates that the Indian farmer is not risk averse, it also dramatically increases the downside risks. It is no coincidence that most farm suicides are associated with farmers who opted for cash crops or even horticulture. Their biggest vulnerability is to price risks.

After the collapse of international commodity prices in 2009, the terms of trade have in general moved against agriculture. This has contributed in no small measure to the taming of inflation by the Reserve Bank of India. End result, as the latest statistics of the Wholesale Price Index reveal: prices of pulses, edible oils, vegetables and fruits (some of these commodities are the flash points for the ongoing agitations) have plunged sharply in the first four months of the current fiscal year.

Coming as it does in the backdrop of the less than par monsoons over the past four years—while nationally we may have had normal rains, in some regions such as Vidarbha or in North Karnataka it has been disastrous—it has pushed the farming community over the edge.

ALSO READ: Rural distress: The deflation in farm prices

The decision of the newly formed BJP government in Uttar Pradesh to declare a farm loan waiver served as a trigger for similar demands across the country. The farmers do have a strong case for a loan waiver (keep in mind that governments have been quick to bail out industries such as telecom when in trouble). While the fiscal purists are right, it is also a fact that given the dependence of so many livelihoods on agriculture, the demand can’t be brushed aside.

Prudence demands a short-term solution with a clear, long-term plan. Mitigating price risks cannot be done merely through price mechanism support. Instead, the revamped crop insurance scheme is a good alternative.

Politicians have to now shed their fears and embrace market-based instruments such as derivatives to reduce price risk pressures to farmers.

In short, the government has to merely create the ecosystem, just like it does for industry through an improved infrastructure and credit delivery system, for Indian agriculture. The proud Indian farmer needs no other help.

Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics.

His Twitter handle is @capitalcalculus.

Respond to this column at anil.p@livemint.com

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