Editorial Simplified: Remove The Roots Of Farmers’ Distress | GS – III

The next issue is the low productivity of Indian agriculture. Basics such as seeds, fertilizers, credit, land and water management and technology are important and should not be forgotten.

Relevance: GS Paper III

Theme of the article

Steps like limited procurement, boosting productivity and consolidating land holdings can help reduce agrarian distress.

Why has this issue cropped up?

Recently, there has been active discussion on the strategies addressing farm distress.

The farm problems

Agrarian distress, in the present context, is mainly in terms of

  • low agricultural prices
  • poor farm incomes
  • Low productivity in agriculture
  • supply side factors
  • declining average size of farm holdings

Prices And Incomes

  • Prices play a key role in affecting the incomes of farmers.
  • Therise in prices for agriculture was much lower than general inflation in recent years.
  • Market prices for several agricultural commodities have been lower than those of minimum support prices (MSP).
  • When output increases well beyond the market demand market prices decline. And in the absence of an effective price support policy, farmers are faced with a loss in income.
  • A few schemes have been suggested to address the problem of managing declining output prices when output increases significantly.
  • The scheme of ‘price deficiency compensation’ is one such mechanism which amounts to paying the difference between market price and the MSP.
  • At the other extreme is the ‘open procurement system’ that has been in vogue quite effectively in the case of rice and wheat, where procurement is open ended at the MSP.
  • A ‘price deficiency’ scheme may compensate farmers when prices decrease below a certain specified level. However, market prices may continue to fall as supply exceeds ‘normal demand’.
  • An alternative is the limited procurement scheme. Under this scheme, the government will procure the ‘excess’, leaving the normal production level to clear the market at a remunerative price. Thus, procurement will continue until the market price rises to touch the MSP.
  • Some States have introduced farm support schemes, examples being the RythuBandhu Scheme (Telangana) and the Krushak Assistance for Livelihood and Income Augmentation (KALIA) scheme (Odisha). One problem with the Telangana model is that it does not cover tenants, who are the actual cultivators.
  • Thus, raising the MSP, price deficiency payments or income support schemes can only be a partial solution to the problem of providing remunerative returns to farmers.
  • A sustainable solution is market reforms to enable better price discovery combined with long-term trade policies favourable to exports.
  • The creation of a competitive, stable and unified national market is needed for farmers to get better prices.
  • For better price for farmers, agriculture has to go beyond farming and develop a value chain comprising farming, wholesaling, warehousing, logistics, processing and retailing.

Low productivity

  • The next issue is the low productivity of Indian agriculture. Basics such as seeds, fertilizers, credit, land and water management and technology are important and should not be forgotten.
  • Similarly, investment in infrastructure and research and development are needed.
  • Water is the leading input in agriculture.Basically, it is not investment alone but efficiency in water management in both canal and groundwater that is important.
  • India uses upto three times the water used to produce one tonne of grain in countries such as Brazil, China and the U.S. This implies that water-use efficiency can be improved significantly with better use of technologies that include drip irrigation.
  • Yields of several crops are lower in India when compared to several other countries. Technology can help to reduce ‘yield gaps’ and thus improve productivity.
  • Government policies have been biased towards cereals particularly rice and wheat. There is a need to make a shift from rice and wheat-centric policies to millets, pulses, fruits, vegetables, livestock and fish.

Land size

  • Another major issue relates to the shrinking size of farms which is also responsible for low incomes and farmers’ distress.
  • The average size of farm holdings declined from 2.3 hectares in 1970-71 to 1.08 hectares in 2015-16.
  • The share of small and marginal farmers increased from 70% in 1980-81 to 86% in 2015-16.
  • The average size of marginal holdings is only 0.38 hectares (less than one acre) in 2015-16.
  • The monthly income of small and marginal farmers from all sources is only around ₹4,000 and ₹5,000 as compared to ₹41,000 for large farmers.
  • Thus, the viability of marginal and small farmers is a major challenge for Indian agriculture.
  • Many small farmers cannot leave agriculture because of a lack of opportunities in the non-farm sector. They can get only partial income from the non-farm sector.
  • In this context, a consolidation of land holdings becomes important to raise farmer incomes.
  • We need to have policies for land consolidation along with land development activities in order to tackle the challenge of the low average size of holdings.
  • Farmers can voluntarily come together and pool land to gain the benefits of size.
  • Through consolidation, farmers can reap the economies of scale both in input procurement and output marketing.

To conclude, farmers’ distress is due to low prices and low productivity. The suggestions we have made, such as limited procurement, measures to improve low productivity, and consolidation of land holdings to gain the benefits of size, can help in reducing agrarian distress. We need a long-term policy to tackle the situation.


Editorial Simplified: Examining Farm Loan Waivers | GS – III

Economists and bankers are sharply divided on whether farm loan waivers are desirable. One section of economists and hard-nosed bankers argues that loan waivers represent poor policy for a variety of reasons.

Relevance: GS Paper III

Theme of the article

The solution lies in better schemes that ensure universal coverage for small, marginal and medium-sized farmers.

Why has this issue cropped up?

Till now, at least 11 States have announced schemes to waive outstanding farm loans. The pitch for waivers among States has added to the pressure on the Central government for a nationwide farm loan waiver.

Problems with loan waivers

  • REPAYMENT: Loan waivers have “reputational consequences”; that is, they adversely affect the repayment discipline of farmers, leading to a rise in defaults in future.
  • PRODUCTIVITY: Earlier debt waiver schemes have not led to increases in investment or productivity in agriculture.
  • CREDIT: After the implementation of debt waiver schemes, a farmer’s access to formal sector lenders declines, leading to a rise in his dependence on informal sector lenders; in other words, waivers lead to the shrinkage of a farmer’s future access to formal sector credit.

Critical assessment of above arguments

  • REPAYMENT: Farmers are most disciplined in their repayment behaviour. In September 2018, agricultural NPAs (about 8%) were far lower than in industry (about 21%).
  • DEFAULT: There is no evidence to argue that the 2008 loan waiver led to a rise in default rates among farmers.
  • PRODUCTIVITY: The argument that loan waivers do not promote investment or raise productivity is a bit absurd because nowhere has investment or productivity figured as the official objectives of these schemes.
  • CREDIT: The argument that loan waivers shrink access to formal credit sector for farmers is only partly true. But the culprits here are banks and not farmers. After every waiver, banks become conservative in issuing fresh loans to beneficiaries, as they are perceived to be less creditworthy.

Arguments for loan waivers

Firms have always received debt waivers. Just as for firms, farms also need a reduction of debt burden, followed by fresh infusion of credit, when their economic cycle is on a downturn. The demand for loan waivers in India is absolutely logical when viewed from such a standpoint.

Not a panacea

  • To consider loan waivers as a panacea for the agrarian distress would be wrong.
  • Access to India’s rural banks is skewed in favour of large farmers.
  • While public banks actively service the credit needs of large farmers, a majority of small and marginal farmers are not proportionately included.
  • The latter are forced to rely on informal sources, particularly moneylenders, for much of their credit needs.
  • As a result, the benefits of loan waivers accrue disproportionately to large farmers while only marginally benefiting the small and marginal farmers.

The solution

  • The solution lies in carefully designing waiver schemes that ensure universal coverage for small, marginal and medium-sized farmers while covering both the formal and informal sources of debt.
  • The Kerala Farmers’ Debt Relief Commission Act, 2006 is an excellent model in this regard. This scheme defines debt as “any sum borrowed by a farmer from the creditor”, with the creditor defined as “any person engaged in money lending, whether under a licence or not”.
  • Legislations such as Kerala’s are blueprints to design comprehensive, inclusive and less-leaky loan waiver schemes in other States.
  • While loan waiver schemes are like a band-aid on a wound, it is the larger agrarian distress that demands urgent policy attention.
  • Unless there are steps to raise productivity, reduce costs of cultivation, provide remunerative prices, ensure assured procurement of output, expand access to institutional credit, enhance public investment, institute effective crop insurance systems and establish affordable scientific storage facilities and agro-processing industries for value addition, etc, farmers will continue to be bonded to low income equilibrium and repeated debt traps.