Higher prices could lower clamour for farm loan waivers

Falling prices had put farmers in various parts of the country on the warpath for several months.

In some cases, prices of commodities have even fallen below the basic cost of production. 

Increased supplies pulling down demand and causing a price crash is not new. But as the Economic Survey Part-II, released in August, pointed out, the impact in 2017 was greater due to a variety of factors that included imperfect markets.

The slump had ignited calls for waivers of farm loans and five state governments had announced waivers in some form or the other. The total expenditure of these, some experts said, would be about Rs 1-1.5 lakh crore. Assuming more states adopted such waivers, the expenditure could rise to more than Rs 2.7 lakh crore. The Survey had also highlighted this.

The cost would be almost double the annual subsidy on food for 2017-18, and would make it many times more than the budgetary allocation for the ministry of agriculture.

There are opinions in favour and against farm loan waivers. Some argue such a measure could give temporary relief to farmers suffering due to two consecutive droughts and a big fall in farm-gate prices. But others say the ill-effects of such a measure could have a debilitating impact on the economy.

“You can’t ignore farm loan waivers because it will ensure that the farmers, particularly small and marginal ones, are brought back into the formal credit system. Also, it must be recognised that there is a crisis in the agriculture sector and we shouldn’t take a narrow view of it,” former chairman of the Commission for Agriculture Costs and Prices (CACP) T Haque told Business Standard.

Haque was one of the main drivers behind the farm loan waiver scheme announced by the newly elected Amarinder Singh government in Punjab.

Referring to the argument that a more comprehensive structure of supplementing farmers’ income be considered instead of waivers, he said this was not good enough, as the impact of minimum support prices (MSPs) was limited to some crops. “Why are issues like vitiating the credit culture, etc, not seen when corporate loans worth crores are just written off?” Haque asked.

There, too, reports showed gross margins were not big enough when compared with the average weighted comprehensive cost of production (C2). Comprehensive costs include all paid out expenses, plus the imputed value of unpaid family labour, along with rentals and the interest foregone on owned land and fixed capital.

The Centre estimates margins by comparing these with A2+FL (projected costs, which includes all paid out expenses in cash and kind, along with the derived value of unpaid family labour).

Even with this yardstick, of the 17 crops whose MSPs were announced for the 2017-18 kharif season, gross margins or returns to farmers of only three were 50 per cent more than their average weighted cost.

Gross margins have not always been commensurate with the average weighted cost. Between 2008-09 and 2010-11, the net rate of return in percentage terms in relation to C2 for most kharif crops was below 30 per cent, except for sesame and cotton. The reruns were, however, better when compared with gross rate of return over costs, as measured by A2+FL.

“For me, personally, there will be a very small number of farmers who are benefited from farm loan waivers, as more than 60 per cent of them are outside the formal institutional credit mechanism,” NITI Aayog member and economist Ramesh Chand recently told newspersons.

Estimating a rate of return on cost incurred is all the more difficult in horticulture, as planting processes are dissimilar while there is no uniform reference price like in the case of cereals, pulses and oilseeds.

Data from the department of consumer affairs show that between September 2016 and September 2017, the wholesale price of potatoes across the country dipped by an average Rs 700-1,000 a quintal mainly because of a bumper harvest. Onions were better off mainly because of a surge in the past few months. But, as the Economic Survey said, there were a vast regional and crop-wise variations in these trends.

In the agricultural year ended June 2017, the Survey said relative to the previous year, real revenues (prices multiplied by the quantity of arrivals deflated by the rural Consumer Price Index) have declined the most in moong (30 per cent) and the least in potatoes (four per cent), respectively.

Uttar Pradesh appears to have done reasonably well in most crops on the real revenue front, including in wheat and potatoes. Madhya Pradesh saw an increase in the amount of sale at prices below MSP. UP is one of the states that had announced a big farm loan waiver for farmers, costing the state around Rs 36,000 crore.

In other words, just a waiver of farm loans might not solve the problems, particularly those associated with surplus production, poor markets, fragmented sale avenues, and inadequate and inefficient processing facilities, in the case of horticulture crops. A waiver could, at best, give a temporary respite, at the cost of the exchequer.

The big question is, do the states have the wherewithal to bear these?

As Ajay Jakhar, chairman of Punjab Farmers Commission, said, “Farm loan waivers, accompanied by substantial policy changes, can be the approach to address farmers’ crisis. Anything done in isolation won’t work.”