Elbow room less for usual policy

Traditional responses like MSP rises or loan waivers hamstrung by worry on fiscal deficit and inflation; rural jobs scheme already struggling

On Monday, Union Agriculture Minister Radha Mohan Singh announced the government had deferred farm loan recovery by a year, due to crop damage. The announcement gives a sense of how acute is the agrarian crisis, which is likely to worsen if, as the weather office says, rainfall is below normal this year.

Much of public discourse on the issue of farm distress has focused on policies to deal with resolving the long-term and structural issues. In the short run, political expediency demands immediate intervention, many conventional policy responses are likely to be hamstrung by the need to keep the fiscal deficit and inflation under control.

One such measure is to substantially raise the minimum support price (MSP). Every year, the government announces MSPs for crops, a floor price for farmers to sell their produce. Though state procurement is largely confined to rice and wheat, MSPs do provide a benchmark for other crops as well. Raising these substantially could compensate the farmer for loss in production.

LIMITATIONS

• Sharp increases in minimum support prices are likely to be inflationary
   
• Under MGNREGA, amount of work provided is falling
   
• Limited fiscal space at Centre to grant a loan waiver
   
• Fiscal space available at state level to provide compensation to farmers

However, the move is also likely to raise price levels in general. In its first year in office, the present government chose to moderate MSP rises, departing from its predecessor's practice of raising these quite generously. This has helped bring prices under control. But, with rural stress building up, this policy stance might have to be reversed. Doing so will not only impact the fiscal deficit, state-run Food Corporation of India will have to procure at higher prices but will also squander the hard-won gains on the inflation front. The dilemma, says Madan Sabnavis, chief economist at CARE Ratings, is whether to help farmers in the form of higher MSPs or households in the form of lower inflation.

Rural job work
Another channel to mitigate the extent of distress is through the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). The demand-driven programme for guaranteeing an annual 100 days of work could be effectively used to provide income support to small and marginal farmers, and landless labourers. In the Union budget, the finance minister allocated Rs 34,699 crore for the scheme and later promised another Rs 5,000 crore, if he could raise the resources.

However, as reports in this newspaper showed, both the number of people working under the scheme and the amount of work provided are dwindling. For the February to March period this year, 347 million person days of work were provided. This is less than half of what was provided in the same period of the previous year. Also, the decision to concentrate the scheme in roughly a third of the blocks is likely to limit its impact in alleviating distress.

Pronab Sen, chairman, National Statistical Commission, argues the scheme is "extremely crucial during drought years, especially for small and marginal farmers, who in drought years end up selling their land". However, with stretched public finances, it is difficult to see greater allocation to MGNREGS unless expenditure elsewhere is cut.

Sabnavis is sceptical about the central government going beyond the amount allocated in the budget, given its limited fiscal room. He says the programme is likely to be targeted towards states with low rain. The scheme's impact on alleviating rural distress is likely to be muted.

Loan waivers
The other conventional policy response that governments in the past have resorted to is of a loan waiver. In 2008, then finance minister P Chidambaram had announced a farm loan waiver of Rs 60,000 crore in all. Even discounting issues of moral hazard, with the already stretched public finances, the capacity of the government to grant a waiver is severely constrained. Sabnavis says a loan waiver should "ideally be the last resort, when everything else fails".

While the government has already announced deferring farm loan recovery by a year, who will bear the cost is unclear - it or the banks? Public sector banks are already saddled with a high level of non-performing assets. The stress on their balance sheets is likely to worsen if they have to bear the costs of this move. On the government's part, any fiscal slippage, unless cuts in expenditure are made elsewhere or the government is able to raise more resources, is likely to be viewed negatively.

Other ways
One move, likely to have a limited impact on the centre's fiscal position, is for states to increase the compensation to affected farmers. According to Aditi Nayar, Senior economist at ICRA, "Adequate compensation for crop losses released in a timely manner to farmers could help alleviate the distress being experienced in some areas. The compensation costs could be shared by the central and state governments."

Funding to provide this compensation at the state level might already be available, suggests a new report from Nomura. It says there is a huge gap between what the Centre estimates it transfers to the states and what the latter estimate they get from the Centre. For 16 major states, this figure is Rs 42,510 crore. Part of this, the report points out, could be used to compensate farmers.

The issue, as Sen sees it, is also of preparedness. "Long-duration crops don't work in drought. Governments, especially in states, need to persuade farmers to shift to short-duration crops and those consuming less water. For this to work, governments need to ensure farmers have the inputs, the appropriate seeds and fertilisers." While this might seem obvious, Sen questions the states' preparedness saying, "While we know what to do, are we ready?"

Further, the strategy regarding foodgrain management will be critical. During drought years, food prices typically rise to reflect scarcity, which helps farmers make up for the loss in production. This wasn't the case last year, as the government intervened in the market by releasing foodgrain, thereby depressing the prices. While this constrained inflation, farmers were not adequately compensated.

In such situations, "the timing of government intervention is critical" says Pronab Sen. Adding: "If government intervenes too early, farmers get hit. If it's too late, consumers get hit." The government should ideally allow prices to rise, so that farmers are compensated and then release its stock of foodgrain to depress prices.

Although one is likely to get a more accurate picture of the monsoon in the coming weeks, economists have already started estimating the impact of a week one on growth in gross domestic product (GDP). CARE estimates a poor monsoon could push down agricultural growth to 1-1.5 per cent, bringing down GDP growth to 7.7-7.8 per cent in 2015-16. CRISIL also estimates a deficit monsoon could shave 50 basis points from their GDP forecast of 7.9 per cent for 2015-16.