Good Economics can be Good Politics

One bad move has the potential to derail the systematic overhaul of the economic and financial systems in India. The farm Loan waiver announced in Uttar Pradesh during the recently concluded Vidhan Sabha elections is one such move. As expected, Farmers, farmer leaders, Opposition all have smelled blood and the clamour for such waivers will reverberate all across the country. It is a situation where politics will overshadow everything else. The “Annadata” label given to farmers will be a millstone around every state Government’s neck. In any case, it is the easiest cop-out way for politician’s, to play a hero.

The real tragedy of the farm loan waivers is that the really needy do not get it, as they are out of the formal lending system. The rural Banking system is in itself a big mess. The co-operative banks, which were started with the sole aim of helping farmers, have become another haunt of the politician’s to milk the system. The corruption in co-op banks is possibly the highest in any of such institutions.

It is a documented fact that of the last Farm loan waiver in 2008, a miniscule minority of the small and marginal farmers were helped. In Maharashtra, majority of the money went to the Co-Op bank’s and helped them hide their mess for some more time.

It is nobody’s case that the farmers are not a distressed community as a whole. They have been forced to remain poor due to the very policies that have been designed to help them. A skewed policy towards cereals and the MSP mess, farmers lurch from one disaster to the next.

In India, (2011 census report) 85% of farmers are in the small and marginal dispensation. Nearly 11.5 cr farmers have land holdings of less than 2 hectares, tilling about 8.1 crore hectares of land.

Source: State of Indian Agriculture 2015-16 Report

How many of these farmers are in the formal lending system? Agricultural credit has increased from about 1.25 lac crore in 2003-04 to this Year’s target of 10 lac crore, a CAGR of 24%. But the worrisome aspect and the real reason for discontent is due to the fact that the household access to credit has gone up from 58% in 2003-04 to 60% in 2013-14, which is almost negligible growth.

Source: State of Indian Agriculture 2015-16 Report

One other aspect of agriculture that is seldom discussed is the high level of disparity in productivity, even in same districts. A cursory glance at productivity at state level shows the immense gulf, and the necessity of doing something on that front. The accompanying charts show the disparity in agricultural productivity of the 2 main cereals, Viz. Rice and wheat

Productivity: Rice

Productivity: Wheat

In rice, in top 10 producing states in the country, we have Chhattisgarh having a productivity of about 1580 kg/ hectare and Punjab doing 3800 kg/ hectare.

In Rice, Bihar has a productivity of 1850 kg/ hectare, while Haryana has it at 4575 kg/ hectare.

The highest productive states are also not on par with international productivity levels.

Many expert committees have submitted voluminous reports over the last 60 years to the Government. Some policy changes have helped to a certain degree, but in the overall context, not much has changed for the farmer, and remains at the lowest strata of earners. Every expert or amateur knows what the problems, but what is the way out, especially in the matter of credit and loans to farmers? Loans for agriculture this year have been targeted at 10 lac crores.

The Kisan Credit Card did achieve a modest success, wherever implemented correctly.

Why is it not possible to start a MUDRA type of scheme for small farmers?
Farmers would be happier with working capital loans for a fixed duration, rather than from season to season. This would also enable them to plan out their activities much better. And if MUDRA loans can be given without collateral, why cannot the farmers get such loans? Farmers are not beggars or asking for doles, they just want an equitable distribution of their just dues.

A formal lending system for small farmers would come with so many advantages. Soil Health cards, Farm Insurance, personal insurance, Fertilizer subsidy, produce sales, etc can all be linked together in one policy. The quantum of funds can be decided on the acreage, an amount which is adequate and feasible with the least amount of discretion. The duration of the loans should be 5 years. This will be a strictly working capital loan but with the benefit of Term lending. Interest rates can be linked to the market’s, with interest subvention being left to the discretion of the state. With best reach in almost all places in the country Post Office bank can be a vital cog in this lending, and can play the leading role in such an enterprise. A Loan of 1lac per hectare (for eg) and 50% of agriculture credit ear marked for this scheme may be able to benefit minimum 5 crore farmers in the first year itself. With the new PMFBY and linked to personal insurance of farmers, the NPA levels in these loans are certainly manageable. With Industry finding new avenues for loans, Banks flush with funds, why is it not possible to finance the farmers and farm related industry more?

Once a farmer gets a sort of a term loan, he/she will be in a much better frame to plan out his produce and product. A rising productivity is almost guaranteed, and that has to be the ultimate aim of any reform in agriculture.

The Government has also announced a 4% interest subvention scheme for farm loans. States can also decide to intervene at their level. All this would make the loans to farmers very much affordable. With the repayment sword not hanging on their heads after every crop, the farmer would also be in a position to take a bit of risk, plan things out better. Down the line, based on the repayments being done, the quantum of loans can be increased.

Band-aid solutions have never worked anytime or anywhere, not even in the short time. A genuine, holistic approach is the need of the hour to dispel the doomsday atmosphere in agriculture.