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Loan Waivers Give No Real Solution



By Nilanjan Banik


On the eve of Uttar Pradesh election, Prime Minister Narendra Modi promised if BJP wins, then farm loans will be waived off. BJP won and farmers in UP were gifted with farm loan waivers. In Maharashtra same thing happened. Now it is turn for Madhya Pradesh and Tamil Nadu, only for the farmers agitations to turn violent. But then waiving off farm loans are not going to help the Indian farmers in the long run. The real cause of their distress lies somewhere else.


Every year, during summer months drought happens and farmers commit suicides. Between 2012 and 2015 over 10,000 farmers committed suicide. In a first, we look at the real reasons for farm suicides. We find reasons for a farmer not realizing the market price has to do with inefficient supply chain management and lack of irrigation facilities in rural areas. Fluctuation of agricultural output in India is due to supply-side shocks resulting from inadequate rainfall, rather than demand-side factors (resulting from lower per-capita income). Investment in rural infrastructure, such as electrification and building canals, will help to mitigate losses due to crop failures, and thereby would reduce the probability for a farmer committing suicide. Additionally, other factors such as lack of reforms to the Agricultural Produce Market Committee (APMC) Act, low bargaining power resulting from small farm size, and lack of warehousing facilities are also important. Waiving off farm loans is not the solution.


In India, not only per-capita agricultural income is low, and but at times it is not possible to sustain this low income. Also, agricultural output fluctuates far more than the outputs of the industrial and services sectors. Official output data shows that during the period between 1991-1992 and 2013-2014, the coefficient of variation for agricultural output is 191.34, in comparison to 50.48 for industry, and 22.03 for services sector. This has led to unequal income distribution in India with rural-urban wage gap at 45 per cent in comparison to around 10 per cent for China and Indonesia. Some 850 million people still live in rural India. India has around 260 million people living in poverty and 80 per cent of them live in the countryside. According to World Bank, India house largest number of poor people in the world.


World Bank data shows only 35 per cent of India’s agricultural land is irrigated (artificial application of water to land or soil). This means the majority (65 per cent) of farming is rain-dependent, most of which happens just a few months over the summer. As Figure 1 shows, likelihood of a farmer committing suicide is more during bad-rain years. To have a meaningful comparison, we standardized rainfall and suicide data with respect to mean and variance, to make them unit free (read, std. rainfall and std. suicide).


Volatile rainfall patterns lead to lower farm income. The median annual wage for a farmer in India is around US $290 which is barely two months’ minimum wage in Mumbai – the commercial capital of India. Because of lack of proper irrigation facilities, and weather insurance schemes, farmers’ typically get stuck to growing low-value crops such as rice and wheat, although there is an ever increasing demand for high-value stuffs such as fruits, and vegetables.


In India, if farmers are to sell their produce, they have two options. First is to sell directly to the government at the MSP. MSP is the minimum price for a product established by the government and supported by payments to producers in the event of the market price falling below the specified minimum. The Central government procures 24 essential food items from the farmers through agencies such as National Agricultural Cooperative Marketing Federation of India Limited (NAFED) and Food Corporation of India (FCI). The second option is to take their produce to the nearby government-designated mandi (market)where in front of state officers they can auction produce to the brokers. Mandis are the markets in smaller towns and cities to which farmers from nearby villages bring their agricultural produce to sell. There are around 7700 government designated mandis spread across India.


Typically, MSP is higher than the market price, and one would assume that farmers gain every time the government announces the MSP. However, farmers are seldom able to sell their produce at the MSP. Every village does not have NAFED or FCI outlets. FCI has a minimum presence in other major rice and wheat producing states like Bihar, West Bengal, Assam, and Orissa. Compared to all-India average of 7340 farmers’ suicide committed between 1995 and 2010, only West Bengal has a higher suicides numbering 19331 between 1995 and 2010. The corresponding figures for Assam, Bihar, and Orissa are 3566, 1235, and 4460, respectively. And, even if there is an NAFED or FCI outlet, the government may not procure if the farmers bring their produce before/after the dates of procurement.


The farmers are at whim of local traders and are forced to sell their produce in the informal market. In India, as much as 83 per cent of the farmers are smallholders, with less than 1 hectare of landholding. These smallholder farmers do not have access to cold storage, and have no option but to sell their produce to the middlemen or traders. It is impossible for them to get a space in the state storage facilities without any political connection.


APMC regulations prevent supermarkets, exporters, and agro-processors to procure fruits, vegetables, and cash crops, directly from the farmers. This prevents contract farming which otherwise can entail better price realization for the farmers. In summary the findings leads to number of policy implications.  First is to rise above party-politics and ensure reforming the APMC Act. This will ensure farmers realize market prices for their produce. Second is timely procurement through MSP. Lack of storage, adequate refrigeration and sanitation facilities degrade quality of perishable items, compounding the farmer loss. Third is requirement of training, education, and urbanization. This will facilitate employment opportunities for the 70 per cent of Indians who are still dependent on the agriculture sector. Finally, instead of spending on subsidies, investment in rural infrastructure, such as electrification and building canals, will help to mitigate losses due to crop failures. (IPA Service)




The writer is Professor, Bennett University.


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