Events & Issues

New Delhi, 9 March 2016

Land-mark Budget

SILVER LINING FOR FARMERS?

By Moin Qazi

This year, the Union Budget’s special thrust on farmer welfare is very encouraging, particularly at a time when the agricultural economy has been affected because of deficit rainfall. There is little doubt that with 60% of our population into agriculture and allied activities, a boost to the rural sector was long overdue. As has been claimed, the Government has indeed shed its perceived urban bias and delivered a ‘pro-farmer budget’.

However, much would depend upon how the Government ensures its policy interventions and allocations transcend the budget papers. One of the constraints faced by Indian agriculture is the need to increase farm productivity and improve yield which will improve farmers’ incomes, especially for crops in demand. This requires attention towards development and proper usage of high-yielding, resistant varieties of seeds and crop protection measures.

It is extremely significant to augment post-harvest logistics to help store and save produce, consequently reducing imports. And, increase spending and concrete steps to further solidify reform measures announced under National Mission for Sustainable Agriculture under Krishi Unnati Yojana.

The complexity of the Indian agricultural economy can bewilder any observer. And not just because of the agri climate zones or the types of crops, but also because it suffers from problems that are neither easily visible nor easily comprehensible or solvable. Despite being the country with the second largest agricultural land in the world, hardly two fifth or 40% of the agricultural land is irrigated. Also, even though the country boasts of being the highest producer of many major agro commodities in the world, it suffers from low productivity.

 
It may sound clichéd, but agriculture remains a critical element of the Indian economy. Even though agriculture and allied sectors contribute just about 14% to the GDP (2013-14 estimates of the Central Statistics Office), its direct and indirect impact on Indian economy is huge and multifaceted. Approximately 70% of the rural households survive on agriculture and this population has a lion’s share in the consumption of many consumer durables and non-durables, rural vehicles, two wheelers and tractors.

Also, rural income which primarily is farm-driven is a critical component of infrastructural sectors such as construction and cement. Another dimension of the importance of agriculture in Indian economy is the forex that it generates for the country. Agricultural and allied industries exports account for nearly one fifth of the total exports of the country and have grown sustainably over last decade or so. Indirectly, agriculture plays a big role in some industries such as food processing by providing bulk inputs.

The lack of State support, either through investments in micro-irrigation projects or in effective extension support to farmers, has compounded the woes. Bank credit continues to be scarce, forcing farmers to take loans at exorbitant rates from moneylenders, exacerbating the risks. Extension workers who are supposed to fill that role are often poorly trained, and their numbers are often inadequate to cover a majority of farmers. Most farmers instead depend on input dealers for advice, who force upon them highly expensive brands of insecticides and herbicides.

The existing lending network in rural India, whether we like it or not, is still dominated by moneylenders. Their pricing of risk is premised on hand-me-down philosophies that revolve around predictable patterns of agriculture—a two-crop harvest of rice and wheat (both of which have a guaranteed price from the Central government) and associated income cycle inter-twined with the monsoon.

So, the farmer borrows ahead of the harvest and repays immediately after its sale. In this situation the only variable is the monsoon, the vagaries of which are also fairly predictable, leaving the farmer and moneylender fairly aware of the pricing risks. Since the ticket size of these loans is relatively small, say Rs 25,000-50,000, the conventional usurious pricing at 40-50% works reasonably well to keep the farmer just sufficiently above water and the moneylender in good fettle.

Now, in this situation if you introduce the opportunity of using hybrid commercial crops or squeeze in a third crop, then the situation changes dramatically, as not only does it introduce new variables, but also increases the downside risks for the farmer dramatically. The farmer’s math shows that upping his investment (average loan size for this class of farmers is Rs 50,000-100,000) would bring better gains, and eventually a faster way to economic prosperity.

A perfectly valid commercial decision, but it overlooks the fact that the moneylender does not have the wherewithal to price this enhanced risk; the moneylender would simply increase the collateral or the interest rates—in either instance the downside risk goes up linearly for the farmer. While in good times the farmer does reasonably well, the downside is a sure-shot guarantee of falling into a debt trap.

This mismatch of willingness to take a commercial risk and inability to price it economically is what lies at the heart of the frustrating issue of farmer suicides. On the other hand, an institution following commercial principles that allow for hedging the risk and thereby reducing the odds in the case of a downside risk of, say, a monsoon failure and consequent drought or a pest attack (some of the hybrid seeds are highly vulnerable to such contagion).

Farmers in India have had to cope with the removal of a government safety net that guaranteed them fixed cotton prices. Starting in the 1970s, the State of Maharashtra would purchase all cotton production at a price independent of world market prices. This programme was called the Monopoly Cotton Procurement scheme. It guaranteed cotton farmers a fixed price for their entire crop. Mismanagement and financial losses led the State to open up cotton trade to private traders in 2003 and to discontinue the monopoly scheme. The State still purchases some raw cotton from farmers, but the average prices it offers are below the average cost of production.

Government support has declined. The extension centers run by the local government have not been able to provide farmers with adequate information and training regarding growing the new varieties of cotton. To choose seeds, many farmers rely on information given by private seed companies.

Access to formal credit has become more difficult. The Indian rural credit system has faced a financial crunch that has led State banks to tighten their lending requirements. Many farmers have to resort to informal sources of credit. Farmers borrow funds from moneylenders, friends and relatives. Moneylenders tend to charge usurious rates and have draconian collection tactics that can lead farmers to despair. Will the Budget proposals make amends?

One hopes that this year’s Budget would be a harbinger for better times for Indian farmers. ---INFA

(Copyright, India News and Feature Alliance)