Farm Distress, Loan Waivers and Winning Elections

M. Dinesh Kumar, Mahendra Singh Verma and MVK Sivamohan

It was on the 11th of December, 2018, millions of Indians were hooked to their television screens to get a glimpse of the results of elections held in five Indian states. This was considered as semi-finals for the 2019 General Elections, or a pre-cursor which would set the tone for it. It was amusing to find that as soon as some early trends (from the counting of postal ballot, which total a few hundred votes in each constituency) starting trickling in, some psephologists started predicting a sweeping of elections by one resurgent political party, and political pandits began examining the reasons for a national party losing after 15 years of rule. “The ruling party is routed out of power in three of the states from the Hindi-speaking belt”. Some political Pandits shouted at the top of their voice from the TV studios. Hence, much before the trial began, the verdict was passed by the expert panelists sitting on debating panels. The reason: “the government of so and so person failed to understand the farm distress in India, and on the other hand, the manifesto of the ‘winning party’ had farm loan waiver as the most important agenda item”.

We have been hearing about farm distress and the desire of (45%) Indian farmer to ‘leave farming’ out of disillusionment from the scholars for decades now, and we should trust their knowledge of farming and farmers. It is a different matter that the last time when most of these political analysts (many of whom are now in their late 50s and early 60s) met an Indian farmer in a village was nearly 25 years ago.

Many economists and political/social scientists had written about lack of economic rationality in the policy followed by recent governments to increasingly depend on sops like ‘farm loan waiver’ to stay in power. As correctly argued, it increases the government’s fiscal deficit; distorts the credit market; reduces the incentive among farmers who had taken bank loans, for taking calculated risk to earn greater profits and repay the loans. Further, it sets a precedence. Therefore, it has long term negative impacts on economic management. When a government milk federation is asked to purchase milk at a price 5 rupees higher than the market price, we are ruining the financial health of the milk federation (which is fighting for survival at meagre profit margins), while killing the entrepreneurial skill of the dairy farmer to reduce his input costs and earn greater income through sale of butter, curd and ghee.  

Yet, there seems to be a consensus among the scholars that as a short-term measure, it works. No commentator has raised questions about the political correctness of this measure because there is no nuanced understanding of how this works on the ground and whether this is really helping political parties to win votes or not. There is no systematic empirical work on the effectiveness of ‘farm loan waiver’ as a political currency. Often correlation is misconstrued as causality. When a political party, which promised ‘farm loan waiver’ in its manifesto, wins an election, the victory is attributed simply to it.

One reason for this is that most of us fail to understand the changing rural scenario in India, especially the characteristics of Indian farms and farmers, and how announcements like farm loan waiver are perceived by the farming community, and are simply carried away by political commentators. Over the past 20 years, Indian farming has undergone a major transformation and this goes. This transformation is characterised by a gradual shift towards dairy farming and production of high value crops, comprising fruits, vegetables, spices and flowers, and this shift is supported by the high growth in demand for these produce in the domestic market as well as international market, with a clear change in consumption pattern and food preferences of the country’s population. This has implications for farm income and farming risk.

As regards the farm income, though the average farm size has reduced consistently, the average income per unit area of the farm in real terms has increased remarkably, compensating for the decline in aggregate income due to the former change.

As regards farming risk, it increased considerably, as compared to growing subsistence crops. Farming of many of the high value fruits, vegetables, spices etc. face production risk as well as market risk, with wide fluctuations in yield and price across seasons and years. Therefore, only the enterprising farmers (small and large) go for such crops in a big way. But the risk-taking ability is generally higher for the large farmers (by virtue of the wherewithal such as land, irrigation source and farm machinery), and hence we will find that the proportion of farmers who go for such crops is more for large & medium holding category which is wealthy.

One can also find that a large proportion of them also go for formal institutional credit (for drilling wells, for procuring MI systems and poly-houses and for buying farm machinery) and the investment required for cultivating such crops is escalating (for seeds of high value crops, MI equipment, green house, etc). Even when the small and marginal farmers go for bank loans, the amount is likely to be small. So, the first set of farmers who are immensely benefited by farm loan waiver is the large and farmers who have taken large amounts from nationalized/ scheduled banks. The marginal farmer might have approached a money lender from the village for credit, as the transaction cost of obtaining loans from the banks is always high and difficult.

These glaring facts should expose the falsehood that is systematically and consistently paraded by some of the farmer organizations that loan waiver would help reduce the “distress” in Indian farms. The public perception that many powerful industries were given undue favours by governments through loan waivers, relaxation of loan repayment norms and tax incentives is used by these organizations to arm twist the government. There is nothing surprising in this, as these organizations are controlled by large and influential farmers and local political leaders who at times are feudal landlords.

In reality, every time a farm loan waiver is announced by a ruling party, it brings some cheer among the ‘smart farmers’ who had taken bank loan and defaulted. But it creates unhappiness among those who had repaid the loan to the bank. He feels cheated. It also creates uneasiness among those who had gone to the money lender and who charges exorbitant interest rates. We have no doubt that the second and third category of farmers will be very unkind to the party which announced such schemes in the subsequent election. Since the number of large & medium farmers is very small in comparison to the number of small and marginal farmers in every Indian state, loan waiver is unlikely to be a game changer in elections. The numbers will speak for themselves. The farm loan waiver amounting to Rs. 36,259 crores (US $ 5.3 billion) benefited only 7 lac farmers in the most populous state of Uttar Pradesh. In Maharashtra, 31 lac farmers benefited from a loan waiver of Rs. 30,500 crores (US $ 4.5 billion). This is a small number when compared to the tens of millions of farmers in these states.

The second point is about the characteristics of Indian farmers. The Indian farmer is no longer the one whom we have seen in Mother India through the legendary characters played by Rajkumar and Narghese Dutt as indebted farmers who were devastated by a natural calamity which destroyed their crops. Unlike the farmers of yester-years, today’s farmers have many occupations and farming is just one of them. A marginal farmer would also work as farm-labourer, as he has too little land to plough; he might sell his fresh vegetables on the highway (without depending on a middle man) or might be working as a salesman in a shop in the nearby town. He can as well be a dealer of an MI company or an assembler of farm equipment or a petty trader in the village. So, he has many sources of income, and farming is just one of them. The women in the household might be looking after the dairy animals, watering them and collecting fodder to feed them. This diversification of livelihood has precisely happened because of the decline in farm size on the other hand and increasing aspiration of the farmer on the other. Overall, there is greater resilience to shocks caused by extreme weather conditions and price fluctuations.

The recent farmer protests in Delhi, Mumbai and many parts of MP were also cited as indication of the growing farm distress. Our contention is that what is being observed today as mass protests by farmers is nothing but the outburst resulting from a wider perception that their counterparts in cities are constantly favoured by the ruling party through subsidies and tax holidays when their businesses are subject to market turmoil, and therefore are doing much better, and is not a reflection of any farm distress per se. When they are able to produce large surplus (like in the case of wheat in MP), they want better prices too. We need to reckon with the fact that these days, messages, false or true, spread very fast in rural areas.

We do not claim that there is no farm distress in India. There is and it has been there for centuries. But the real reasons for farmer distress today are overlooked. Farming is increasingly becoming technology and market-driven. The peer pressure to emulate successful farmers with wherewithal and the sales techniques of agri-business professionals which under-plays the risk elements are some of the factors inducing distress among the farmers.  

But unlike in the past, today’s farmer has much better access to information (with mobile phones, television, transportation facilities, etc.) and are much better connected to the market and outside world. While major chunk of them are already beneficiaries of MSP, and subsidies for power and irrigation water, they are well informed of government finances and knows that it can afford such schemes with increasing tax revenue, though at the peril of the economy in the long run. He had seen tens of billions of dollars (around US $ 6.5 billion per annum) being pumped in to run schemes like MGNREGS to create rural employment. No one wants to write about this new reality of rural areas as it is not politically very appealing. On the contrary, every opposition party wants to use it in elections for creating ‘anti-incumbency’.

Hence there is no reason why the present government at the centre should come under pressure from some lobbies and opposition parties which play high-pitched theatrics for extracting such favours for the farming community, so long as the tax payers’ money is used judiciously for welfare and growth. But the success of the government is not only in doing the right things, but also in winning the perception battle that what is being done is in the interest of the society at large, and not to benefit a few industrial houses.

That said, the new political dispensation in Madhya Pradesh would do well, if they decide to invest the Rs. 36,000 crores, required for implementing the loan waiver scheme, in completing the large irrigation schemes and providing better storage facilities and procurement arrangements for the farm produce. Only such interventions can help reduce the farming risk. After all, it is the remarkable expansion of irrigation facilities through investments in large water projects, which kept the previous government in power for three consecutive terms. 

M. Dinesh Kumar is Executive Director, Institute for Resource Analysis and Policy (IRAP), Hyderabad. Mahendra Singh Verma is advisor-Projects and Partnership, IRAP. MVK Sivamohan is Principal Consultant, IRAP. Email: [email protected]. The views are personal.