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Rural distress 2018: False cures galore

Rural distress is real and its causation is shrouded in unsubstantiated myths. Finding realistic and practical solutions needs a clearing of these cobwebs, not the hubris of campaign rhetoric

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Illustration by Binay Sinha
Shreekant Sambrani
Last Updated : Dec 27 2018 | 8:34 PM IST
After the new Congress state governments announced the promised agriculture loan waivers, party president Rahul Gandhi thundered that he will not let the prime minister sleep until all agricultural loans are forgiven.  One hopes that Narendra Modi would willingly sacrifice sleep in the larger interests of the country, especially the peasantry, whose cause is now dear to all. Rural distress is real and palpable, but the many cures now proposed — most frequently, loan waivers — are not likely to make it go away.

Economists (including the 13 eminent ones who recently issued a paper on development strategy) agree that loan waiver is not the way to deal with it. Procedural difficulties and bottlenecks in clearing these borrowings as well as its negative impact on the ethics of borrowing are among the reasons mentioned. Two main consequences of writing off farm loans need to be highlighted.

The first is a recurrence of such waivers. The V P Singh government wrote off loans of Rs 10 billion in 1990. The Manmohan Singh government followed suit for loans of Rs 70 billion in 2008. I wrote then in these pages “The crisis of indebtedness will recur... sooner rather than later... requiring yet another infusion of relief”.  

Since 2014, newly elected governments of Andhra Pradesh, Telangana, Karnataka, Punjab and Uttar Pradesh have come up with their own variants of such amnesty. Farm loans were major issues in the 2017 Gujarat elections and again in the three Hindi heartland states in 2018. The frequency of recourse to this ‘remedy’ will only increase. Even if the central government were to waive loans nationwide before the general elections in 2019, fresh demands for yet another round of waivers in 2023 or 2024 should not come as a surprise. Erasing farming indebtedness is just a palliative, a mere band-aid, for chronic rural distress.

The second is the quantum of resources needed. The last National Sample Survey found that in 2012-13, 52 per cent of the rural households were indebted with an average of Rs 47,000 per household. The 2017 Nabard survey reported almost identical findings: 53 per cent of the families were borrowers of an average of Rs 1,03,000 (all figures in current prices). Projecting from these estimates, the national farm indebtedness comes to Rs 7 trillion, nearly 4 per cent of the gross domestic product (GDP).

Waiving only half the overdues would add 2 per cent of the GDP to the combined fiscal deficit of state and central governments which is already at the precarious level of over 6 per cent of the GDP. What this will do to the macroeconomic situation in the absence of new avenues of raising resources needs no rocket science.  India’s sovereign rating would suffer; investors both foreign and Indian would likely develop a case of pronounced jitters. The net result would be a sputtering economy which India can ill afford now or any time in the foreseeable future. The worst sufferers will be obviously those at the base of the pyramid, the peasantry and the landless, in whose name this adventure is advocated in the first place. This is why Arvind Panagariya, professor of economics at Columbia University, who served as vice-chairman of the government think-tank NITI Aayog, has called the loan waiver as a “sad race to the bottom”.  

Rural distress is also blamed on market-related factors. The necessity of remunerative prices for farm produce cannot be gainsaid. The central government is committed to minimum support prices (MSPs) 50 per cent above the paid-out costs of production and family labour for most commodities and several methods to implement them. Despite this, MSPs prevail for only those crops bought directly by either the Food Corporation of India (or its designated agency), namely, wheat and paddy, or processors, namely sugarcane by the sugar mills. Most pulses and oilseeds sell today at prices lower than MSPs.

Illustration by Binay Sinha
India now has an oversupply of most commodities, thanks to a combination of factors including steadily rising MSPs, some technological improvements boosting yields and benign weather conditions. MSPs above the market clearing prices thus become mere paper exercises. Only an ill-advised and impracticable government takeover of trade could make MSPs the prevailing market prices.

Higher MSPs of paddy and sugarcane also cause distortions to allocation of inputs. Indiscriminate use of oil-based chemical fertilisers and excessive irrigation in a water-short country are prime examples of inefficient resource use. Disposal of surpluses through exports at below-cost prices compounds the inefficiency.

Even the otherwise attractive cash crops such as vegetables face periodic gluts resulting in crashes of farmgate prices. Those who can ride out the feast-or-famine syndrome do benefit, but many farmers have neither the wherewithal nor the entrepreneurial ability to do so. So diversification of cropping, otherwise expected to spread the risks, does not always work.

All these are blamed on outdated market mechanisms and regulations such as agriculture produce marketing committees, presence of middlemen and long supply chains. When innumerable producers with small volumes are at one end of the supply chain in a country with deficient logistics and connectivity between hinterland and consumption centres, intermediation is unavoidable. Middlemen and brokers are the vital link between the producer and consumer, bearing many risks and intermediation costs. Wishing them away through direct marketing by producers is a pipe dream. Direct exports are even dicier. Similarly, processing is not a panacea for periodic market crashes if the processors’ prerequisite of steady supply at affordable prices is not assured. 

Rural distress is real and substantial. The hoary chestnut, the operation was successful but the patient died, describes well cures proposed to deal with it, but its causation is shrouded in unsubstantiated myths. We attack these myths and are taken aback when the problem worsens. Finding realistic and practical solutions needs a clearing of these cobwebs, not the hubris of campaign rhetoric. This is discussed in a companion piece (Time for Universal Basic Income to be published on January 3).
The author is an economist

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