Economic Survey blames unusual demand drop for recent farm distress

Farm loan waivers may give 'significant' deflationary risks to economy

After a rather quiet first edition, the second volume of Economic Survey of 2016-17 dwelt on the negative impact of farm loan waivers in detail and blamed unusual demand drop alongside limited avenues for sale as being the main reason for the recent distress in agriculture.

It pitched for building strong market infrastructure to stop farmers from getting exposed to price risks. 

The survey which comes against the backdrop of massive agitation of farmers in several parts of the country leading to clamour for waiver of farm loans to save the growers said that managing and reducing the risks in agriculture activities can increase the incomes, profitability, and ensure stable income flows for farmers.

On the recent sharp decline in prices of many farm goods mainly vegetables, the Survey said clearly increased supply led to large declines in prices; but its magnitude was much higher than a similar decline in 2014 as avenues for sale for farmers were limited due to stock limit on wholesalers and retailers of many commodities and also weaker demand as compared to previous years. Although, it didn’t explicitly blame demonetisation for demand destruction in rural India.

In a detailed analysis of the risk to agriculture, the survey said trade or domestic policy changes should be announced well before the sowing time to enable farmers to make informed decisions and the same should be maintained till arrivals and procurement is over. 

On farm loan waivers, the Survey said that loan waivers could reduce aggregate demand by as much as 0.7 percent of GDP, imparting a significant deflationary shock to an economy yet to gain full momentum.  

“The actual impact will depend on the number of states that actually decide to grant waivers, and how they distribute them over time. Some broad patterns are discernible,” the Survey said, assuming that based on the discussions, the total aggregate amount of farm loan waiver could be around Rs 2.7 lakh crore.

“My stand is very clear on the need and efficacy of farm loan waivers; if you treat bank NPAs by kid glove, why not give the same treatment to loans taken by farmers and cultivators,” Shiraz Hussain, former agriculture secretary told Business Standard. 

He said though, he is not a big votary of loan waivers, but then when NPAs of big corporates can be waived off, why not loans taken by growers.

The survey, meanwhile, also pitched for announcing trade and policy changes before sowing and to stay till arrivals and procurement is over.

“This we also support as stable policies will ensure that private investment in agriculture comes, actually to me, agriculture and more importantly agriculture marketing needs a proper champion just like GST,” Hussain said.

On the much talked about, farm distress across the country, the Survey said that economic distress—as measured by real revenues (prices times the quantity of arrivals deflated by the rural CPI)—is not a generaliSed phenomenon. 

For example, it does not afflict wheat and Bengal gram (“chana”), where market quantities and prices have risen, resulting in rising real revenues. But there seems to be a decline in the real farm revenues in pulses and some vegetables like potato.

In the agricultural year ending in June 2017, the Survey said that relative to the previous year, real revenues have declined most in the case of moong (30 per cent) and least in the case of potatoes (4 per cent) with arhar and moong posting declines of around 10 and 28 per cent, respectively. 

There have also been interesting regional variations. Uttar Pradesh appears to have done reasonably well in most crops, including wheat and potatoes. 

In contrast, the Survey said Madhya Pradesh, which had recently been favouring wheat, saw an increase in the amount of sale at prices below MSP.  

Madhya Pradesh was the epicentre of the farmer’s agitation where six of them were killed in a police firing in Mandsaur on June 6.

On market risks, like change in demand and supply, the Survey said that government should allow long term contracts for purchase on pre-determined prices, including direct purchases from farmers.

The Survey also negated any adverse impact of demonetisation on agriculture and said that rabi sowing data and fertilizer sales don’t show any impact.