Farm Loan Waivers: The Economics And Politics Of Indian Agriculture
We are going through another round of intense farmer unrest on loan waivers. As serious analysts always remind us, the rural context is not just economics, it is closely intertwined with ‘a way of life’ and so is also a cultural issue.
Yet, it is important to isolate the economic issue. This is not easy.
There are two issues. The first is the question of economic incentives for the agricultural or rural sector: the so-called ‘terms of trade’ issue, between agriculture and non-agriculture or between rural and urban. In purely economic terms, this is important for non-inflationary growth because food and wage inflation can destroy the macroeconomic balance. The second is the issue of rural money, and more generally capital markets. Ideally, in a rational world, the two issues should be handled separately. The farm and rural sector should get to operate in a favorable economic environment, and capital markets must be efficient.
The real world is of course not rational and farmers have such little economic leverage that they won’t let go the few handles they have. Hence the loan waivers.
The terms of trade for agriculture are an important hidden issue, only given importance by some policy analysts. In a well-known debate in the 1990s, this author and others had pointed out that the terms of trade went against agriculture, and so agricultural profitability went down by 14 percent. The decline in the share of public investment in agriculture, first highlighted by the World Bank, was followed by a decline in private investment, as the terms of trade declined. This author had anticipated it then and was unfortunately proven correct by subsequent events.
By 2012 agricultural fixed capital formation had reached almost record levels of around 18-20 percent of agricultural income. But since then, the terms of trade have again moved against agriculture. These shifting terms of trade are behind the unrest you see now.
Few read the Commission for Agricultural Costs & Prices (CACP) reports where this has been brought up, or listen to economists’ lament about this. These days, to talk about data-based analysis is bad manners, for we have decided to double agricultural income in a short period.
But farmers, as a community, are forcing forward an issue that the few agricultural economists like me have pointed to in our rarefied world. Anybody who goes to a village chaupal knows what the situation is. While data is one thing, you can see the shifting terms of trade on the ground. And if you’ve tracked the farm sector for a while, you can look past the routine complaints that come from farmers and read the real situation. This time, one gets the sense that there is real pain.
Does all this mean that the farmer is justified in not paying back loans taken for growing crops, land development, or investment?
Of course not. For that will hurt his ability to get formal finance in the future. He will have to rely on the so-called kerb market for funds, where interest rates of over 200 percent annually are common, as the recent Debt and Investment Surveys, put out by the Ministry of Statistics & Programme Implementation, show.
But the farmer has few options to bring attention to his plight and so he resorts to Bollywood style protests. Throwing onions and tomatoes on the road and asking for Minimum Support Prices on vegetables, even though it is well known, even to farmers, that outside wheat and average quality paddy, MSPs don’t work.
This time, there is another factor.
The Reserve Bank of India – and I am a great admirer of the Governor’s solid credentials as a globally recognised monetary economist – added to the chaos by keeping Primary Agricultural Credit Societies and Land Development Banks out of the currency exchange arrangement after demonetisation.
Doing so dealt a body blow to agricultural finance because cooperative credit is still a substantial source of rural finance. Normally NABARD stops such misadventures, but this time it apparently stayed quiet.
What Is The Way Out?
Let’s now suspend our practical understanding for a few minutes and go back to an economist’s world. After all, I get a pension which I have to justify. We know that a rural banking service will cost more money to deliver. As the Chakravarty Committee on Banking had come close to suggesting, we should work out the long-range market cost of delivering rural financial services. Normally, a farmer won’t be able to pay that. So let the State subsidise the bank to that extent. Then, for the bank, agricultural lending in the back of the beyond is not a chore but a business. Rural lending is then not just a part of ‘Priority Lending’ but also a business.
I once asked a rural bank manager why he doesn’t lend without collateral in villages, despite the Finance Minister and even the Prime Minister making it a priority. He said, “when my bank’s inspector comes to check my books, the Finance Minister is not there.”
I kept quiet because I knew that my fixed deposits are done with another branch manager just like the one I’d spoken to. I’d want my deposits safe.
Bank managers have to be careful and can’t be Schumpeterian egocentric entrepreneurs. So let’s make rural finance a business.
Still, there will be bad years brought on by drought, floods and so on. As we know, crop insurance is still in its infancy, though promised as a universal panacea. Indian agriculture still is a risky business and the premia will be high to cover that risk. Subsidies only go that far. In these kinds of situations, we will have to roll over the loans. Designing the Loan Package after the 1987 drought, we provided a six-year roll-over.
Solutions are possible, but we don’t have the stomach for them. But let’s get back to the real world. Indian politics and governance do not have the stamina anymore to face up to real problems and solve them. So spare a thought for the poor farmer when he wants a loan waiver. Should he be the only one to reform? Reform, like charity, should begin at home.
Yoginder K Alagh is Chancellor of the Central University of Gujarat. He was the Chairman of the Institute of Rural Management, Anand; and Union Minister of State (Independent Charge) for Planning and Programme Implementation from 1996 to 1998.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.