Photo: Mint
Photo: Mint

Opinion | Why cash transfers will not solve the crisis in agriculture

What the farmer wants is an enabling infrastructure, which allows him to compete globally

The crisis in agriculture has continued to worsen with the latest estimates of inflation suggesting that the trend of decline in farm produce prices has continued unabated. But with the worsening of the crisis, newer ways of providing relief to the farmers are being experimented with. While loan waivers and some form of price support through minimum support price (MSP) was the tried and tested formula for many states, some states, such as Madhya Pradesh, also experimented with schemes such as Bhavantar Bhugtan Yojana, which sought to provide relief to farmers by providing the differential between MSPs and market prices. With elections around the corner, the urgency to provide some relief to farmers has gained momentum.

Both loan waivers and MSP support worked for the opposition, Indian National Congress (INC), with the party winning the three crucial states of Chhattisgarh, Madhya Pradesh and Rajasthan. Buoyed by the success, INC has already promised a nationwide loan waiver if elected. The direct income support scheme, which brought the Telangana Rashtra Samithi back in power in the assembly elections in Telangana, is now being proposed as the model for solving the agrarian crisis. The Rythu Bandhu scheme of the Telangana government provides 4,000 per acre for every season to all the farmers of the state. This has now been replicated and expanded by two other states going for polls this year. Jharkhand has introduced a scheme similar to the Rythu Bandhu scheme with enhanced payout of 5,000 per acre to 2.28 million farmers at the cost of 2,250 crore to the state government. The third scheme is the Krushak Assistance for Livelihood and Income Augmentation (Kalia), which has been started by the Odisha government. Unlike Telangana and Jharkhand, Kalia does not provide income transfer on the basis of land holding, but on the basis of households as unit. The payout at 10,000 per family per year also extends to sharecroppers and landless agricultural labourers.

While the cash-transfer model may be popular and politically rewarding, it is unlikely to solve the crisis in agriculture. Primarily because the crisis is not just of low incomes in agriculture. The genesis of the current crisis lies in the faulty and ad hoc export-import policy, lack of infrastructure and cartelisation and collusion in agricultural markets, which have prevented farmers from realizing the market prices for agricultural produce. It is the combination of these, along with the twin droughts of 2014 and 2015, which created the crisis in the first place. It is also true that the crisis worsened due to the sudden shocks of demonetization and the hasty implementation of goods and services tax, which affected the rural economy adversely. Cash transfers do nothing to resolve any of these, nor are they any guarantee of protection against unforeseen events, whether natural or policy induced. It is neither a substitute for the structural reforms needed in agriculture, nor does it adequately compensate the farmer for the risks and uncertainty of crop cultivation. The current crisis may have worsened due to the sharp fall in agricultural crop prices, but is finally a result of multiple failures of policy. But it is also a crisis which is caused by the failure of the non-farm sector in creating enough jobs as is evident from the deceleration in real wages in rural areas.

Except for the Kalia scheme, which offers some relief to the sharecroppers and landless labourers, most other schemes are also regressive with amount of transfer proportional to the land owned. But the real problem is also of identifying the beneficiaries. In the absence of proper tenancy records, it will also benefit the absentee landlords. However, given that the current crisis is primarily a result of demand deflation in rural areas, it may revive rural demand in the short and medium run. But it is no substitute for the lack of investment in agriculture, which has declined at 2.3% per annum in real terms, during the first three years of this government. On the other hand, state governments, which have already committed a large part of state revenues to loan waivers, will find it difficult to spare money for investment in agriculture. Already, the cumulative amount committed to loan waivers by various state governments has reached 1.9 trillion. The income transfer scheme will further erode the fiscal capacity of states.

While proponents of cash transfer scheme may argue that such a scheme is non-distortionary and, therefore, more efficient, it does nothing to correct the imbalance that has arisen due to movement of terms of trade against agriculture or against price transmissions from international markets. With agriculture diversifying into horticulture and crops with large trade exposure, it has also been accompanied by increasing monetization and mechanisation of agriculture with rising input costs. What the farmer wants from the government is not a dole but enabling infrastructure, which allows the farmer to compete globally. Cash transfers absolve the government from all such obligations. Rather, by taking away precious fiscal resources, it makes the farmer more vulnerable to both market as well as non-market induced risks by reducing investments in basic infrastructure and other measures necessary to support agriculture.

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