Farm distress: Govt addressing issues through piecemeal measures; need to integrate all schemes to make sector more resilient

Agriculture has always been a potentially stressed sector which catches attention only when it has an adverse impact on either price when there is a production shortfall or more recently when the elections results are swung by the perceived voting pattern of farmers. It is hence quite ironical to see how every government and agency are talking about addressing an issue of the farmers which is actually historical and has only been addressed in a piecemeal fashion in the last seven decades.

The issue at hand is the following: The government has announced higher minimum support prices (MSPs) for kharif crops this season. However, for most crops including pulses, oilseeds, coarse grains and some cash crops, market prices are much lower than the MSP and farmers perforce had sold at these low prices as there were no buyers at the MSP.

It cannot be called failure on the part of the government to make this happen because it does not have a machinery to procure anything except rice and wheat which is through the Food Corporation of India (FCI). Therefore, there is nothing new about this. In the last two years, the price of tur crashed in the market due to over production and farmers got lower prices. This happens regularly for onions, potatoes and tomatoes. As a result farmers are unable to service their loans and hence there is distress which has manifested in a negative vote during the elections.

Representational image. Reuters

Representational image. Reuters

The result is that everyone is talking of being with the farmer. State governments have announced aggressive farm loan waiver schemes and there is now a talk of allowing higher credit limits free of collateral on Kisan Credit Cards (KCC) beyond Rs 2 lakh. Also loans given to farmers should now get some leniency when being classified as a non-performing asset (NPA).

Another suggestion is to give more subventions on interest being regularly paid by the farmers so that there is incentive to pay interest. Others are talking of widening the scope of the Pradhan Mantri Fasal Bima Yojana (PMFBY). All these suggestions are not new and have been enforced at different points of time. What makes it unique is that there is an all-out effort to address all the financial strains of farmers at one shot. But is this the solution?

Prima facie there is nothing wrong in this approach as farmers need to be supported. If we are providing support to large corporates and small and medium-sized enterprises (SMEs) in the loan space by various adjustments and changes in rules, the same can be done for farmers too. This is the biggest challenge faced by the banking system, which is continuously used by extraneous factors to dilute the spirit of banking.

There are always compelling reasons given to make exceptions and while doing so time and again we realise that there are more exceptions than the rule. The result is there for us to see in the form of high NPAs which went under the name of restructured assets for a long time before coming into this classification which is now around 12% of total advances.

The justification given is that since the NPAs in the SMEs are lower than those of large corporates, we can relax the norms and as farm loans are better than SMEs, we can forgive here too. This is one of the reasons why Indian banking especially public sector banks (PSBs) does not have much independence in operations.

Financial stress comes from not earning enough in the markets or crops failing. When a crop fails, it is understandable that the farmer cannot repay the loan. This has happened for cotton and oilseeds to an extent this year. The logical question is that in case the PMFBY was operative, it should have ideally covered all such losses. Clearly this is not the case and the scheme has not been a success.

Logically every farm loan should be covered automatically by the insurance under the PMFBY where the government can pay its part of the premium and the farmer’s share can be deducted from the principal given. This is simple and straight forward and should be done immediately to protect the farmer from the volumetric risk.

The issue of price is ticklish. The MSP does not make sense and is only idle sound made especially when there is no buyer. The government cannot force any private party to buy soybean at the MSP. Instead, the solution is to use the futures market and get the farmer to hedge the price in advance and enable delivery so that there is full cover provided to his produce.

With there being a lot of indecisiveness on the futures market, most products have been banned and hence, there is no option for farmers. A lot has been done by the Securities and Exchange Board of India (SEBI) to get the farmers to hedge which is actually a market solution. The success is limited.

If these two objectives are satisfied, farming will be on a strong footing. Instead of having these stop gap measures of giving subventions on interest for those who pay their interest commitment or write off loans, the same amount should be used for hedging and to begin with the state government should get involved as this is the only way out.

Banks today get even more vulnerable giving more loans against the KCC without collateral as there is a perverse incentive to default. Loan waivers carry the usual risk of moral hazard and often banks are not allowed to claim from the government which is busy matching its fiscal deficit and deferring such payments.

Therefore, these announcements are good to hear before the elections but would be forgotten once the votes are cast. It is not surprising that the actual amount of loans waived over the years are not more than 50-60% of what is announced and is also spread over a period of 3-4 years. Admittedly, there are issues in identifying the beneficiaries as there tend to be a large number of bogus claims.

It is clear that we are not really looking for a permanent solution and addressing the problem through piecemeal measures that have a good announcement impact. All the government schemes must be integrated so that the sector is made more resilient.

Besides, while a lot of talk is on bank loans, a large part which could be 30-40% of the requirements is still being met by moneylenders and landlords that are not covered. Integrating all the reforms from pre-harvest to post-harvest marketing is the solution.

It is a no-brainer actually because the issues are well-known and have been debated for solutions for several years now. The problem is we like to address them in a piecemeal fashion and hence have lost the plot completely. The latest noises made on the sector are just a part of this mindset.

(The writer is Chief Economist, CARE Ratings)

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Updated Date: Dec 27, 2018 12:31 PM

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