Understanding farm loan waiver

I wrote a 1,000 word article on why farm loan waivers were bad for everyone. But the article sounded like political rhetoric and so i deleted it. Because waiver is an area which so closely overlaps economy and politics, that it's sometimes difficult to separate out the two.

So this is my second attempt and I will try my best to not sound political . Some opinions might sneak in, but it's purely in the interest of expanding the argument and not politicizing the issue.

To understand impact of farm loans you will need to understand the size and nature of the industry and why are things the way they are.

So first let's look at some ways in which government promotes agriculture.

Existing privileges to Agriculture Industry

1. Land Ceiling :Most states have some form of land ceiling in place, with many states requiring that the agricultural land not be bought by people who have a secondary source of income. This manages to maintain total area under cultivation and makes sure that the land is widely held rather than in the hands of few (Read as Zamindars). This article from Hindu will give you the complete extent.
2. Income tax : Agricultural income is not taxable in India.
3. Subsidies : Subsidies means artificial reduction in cost by government intervention. This is already in place for power, fertilizers, insecticides etc.
4. Support : Support means by research and development like pest resistant seeds, weather information, education on best practices etc.
5. Finance : Special finance schemes to help loans at different interest rates

How big is agriculture?

India produced some 277 Billion KG of food grains in 2017-18. For comparison, India's present population is approaching 1.4 Billion People.

In essence the entire value of India's agriculture produce comes roughly to around 250 Billion US dollars.

What is Minimum Support Price (MSP)?

If you looked at above figures, you might have realized that this is very low compared to the money that you give for them. Average Market price of wheat hangs around 50 rupees per kg and so for other grains.

So what is this MSP that government promises farmers?

MSP is sort of a guarantee which protects farmers from the market fluctuations. Since most of India is still monsoon dependent for irrigation than with groundwater or canal irrigation, bad monsoon or good monsoon can really impact crop production.

This means that if there is a good monsoon, the crop production increases and prices fall. To keep the farmer from losses, government promises to buy excess food grains for its public distribution system at MSP. MSP is declared every season before harvest, and this protects the market from falling too low and protects the farmer's interest.

If the monsoon is not good, the crops die. This creates a different problem as there is no support system for this scenario. Farmers take loans to buy seeds and fertilizers produce crops, and if they are not able to pay back loans, they might stop working in agriculture and move to other areas of more steady income.

Increasingly some areas of the country have also seen farmer suicides.

To avoid such scenarios government keeps working on Loan waivers, so that the farmer is not burdened for the next crop cycle.

Why give waivers? Why not simply increase the MSP

If you are reading these numbers for the first time, the pertinent question becomes why not simply increase the MSP and make farmers rich and then let them handle their affairs as we do?

Well, because of the WTO.

When India was liberalized in 1991, we needed access to global markets. Therefore we signed GATT (general agreement on tariffs and trade) and became a part of the WTO (World Trade Organization)

And here our problems begin.

WTO works on the principle of creating deregulated free markets which everyone can access. Ofcourse, its another matter that such a market cannot be created because every country also has to look at the interests of its people.

If the entire world market was allowed to regulate itself, the advanced countries with better means of production could easily take over the markets in small or developing countries with no means of protecting themselves. This would create colonialism 2.0.

It could also create a situation where all the grains from a poor country was exported to another country in search of better prices, while the people in the poor country starved. This would not have met the social objective.

Therefore WTO created different classes of countries on which different rules will apply. The advanced countries were given smaller relief while developing countries were allowed to control food prices to attain social objectives like food security. Most poor countries have some or the other form of public food distribution system, including India.

The caveat that WTO put in place was that the food production in poorer countries couldn't be directly subsidised by giving more than 10% of the cost of production. I seriously don't know why did we ever agree or sign on such a dumb law, but we did.

The assumption is that no one will sell below the cost of production, and if government is giving more than 10% than the cost of production, then that is a cash incentive.

However the WTO allows countries to work on other aspects like infrastructure, subsidised electricity, education, R&D, marketplace development etc. as long as such investments are not directly incentivising the farmer. So if you recently read about the gujarat government waiving away outstanding power bills for farmers, that falls in this lot. WTO differentiates between social benefit and commercial benefit.

So when it comes to MSP as a way for guaranteeing prices to farmers, government's hands are tied.

The second reason for not increasing the MSP

Second reason for not increasing MSP is the retail food inflation. If you noticed above, if the MSP for wheat is 17 Rupees per KG, the market price hangs from 40 to 54 rupees.

This is because of the supply chain.

Transporting a food grain only takes about 1 rupee per kg for 100 kilometers. So logistics is not the reason for this inflation.

The reason is the margins and the number of wholesalers and retailers in the chain before the grain reaches you. over 60% of what you pay for your food grains, goes to the wholesaler and retailer.

If government increases the MSP by 1 Rupee, the price for consumer will increase by 3 rupees. When the earning for farmer grows by 1 rupee, the earning for retailer and wholesaler combined increases by 2 rupees. That would not achieve the objective will it?

In comes loan Waiver

So we have established that the government can only impact the MSP by so much. So how to benefit the farmer? Here loan waiver comes into play.

Loan waivers look like all loans have been waived off but if you closely watch implementation, they are always conditional. For instance the recent loan waiver by MP government is only for loans within 2 Lakhs. So who gets the waiver can easily be controlled.

The downside of loan waiver is that the banking system suffers. People stop paying EMI's waiting for the loans to be waived. If your loan was waived off year after year, wouldn't you keep delaying payment and spend time agitating ? This makes people at large start believing that NOT paying loans is okay. The issue it creates in the cash flow of smaller banks and NBFCs is also something that stops them from growing healthily.

Loan waiver also doesn't distinguish between people who needed it and people who didn't. If you are a rich farmer with tubewells, you might not have been affected as much as by the bad monsoon. Since there is no way for banks to make sure that the loans were indeed used in farming and not elsewhere, it gives incentive to unscrupulous people.

It also creates social disharmony where one section of the society feels disadvantaged than the other.

You might have definitely asked that why does the government not provide us with guaranteed income source! If you lost your job, no one is coming in and paying off your loans. So why are farmers being treated differently?

Why are farmers being treated differently?

I will quote Lal Bahadur Shastri on this "Jai Jawan, Jai Kisan". Because farming is an incredibly tough job, and it is as important as the soldier protecting our borders. If farmers become disillusioned then the entire food security of a country might go for a toss.

Because farmers not only produce, they also control the means of production, that is the land. Any disruption in food chain directly leads to inflation, which in turn changes to civil unrest.

You should look at the social situation in venezuela gripped with violence following inflation which IMF predicts is reaching around 1 million %. Buying a simple loaf of bread takes a month's salary.

Therefore farmers are the bedrock of economy and not just politics.

Will waivers ever go away?

The only way they will go away is by governments thinking long term and spending considerable amount of money in creating infrastructure for irrigation. As long as we are dependent on monsoons, the production will keep fluctuating and we will keep facing these challenges.

Cumulatively the states have committed 158,000 Crores worth of loan waivers. This is 22 Billion US dollars of waivers for agricultural produce of roughly 250 Billion Dollars. Gross tax revenue collected by Union Government is going to be around 22 Lakh Cr. (300 Billion).

Some of the larger states like UP, Maharashtra and Telangana have a tax income in the range of 40-70 Billion USD and they have talked about waivers to the tune of 3-6 Billion USD.

So the waivers are almost correlating to about 8-10% of the tax collections for state. Can the states put up this much money is to be seen in a country where mountains have to be moved to reduce the budget deficit by 0.1%.

Last Point

The idea of waivers themselves is not bad. But the amount that is at stake here is roughly equal to 10% of the income for governments. Some governments like MP are already under substantial debt. So where will the money come from? Only two possible places. Either it will be borrowed or either some infrastructure or development needs will be cut down slowing progress in other areas to fulfill this and burden the exchequer for future years. The problem with the second option is that if a political party sees that its bound to lose election, it may take a "Scorched earth" strategy and burden the government with debt and exit. This will make sure that the following party that forms the government will not be able to do much.

In any case, it is a lose lose situation. One might promise waivers and win election but not have any money left to help businesses grow. Or one might not promise the waiver and never win. Some also feel that if politicians actually remove the issue of waivers, then the election will have to be fought on more nuanced issues which is far more difficult than promising money to buy food.

The third option can be to increase tax collection. But this cannot grow by 10% without losing popularity.

This is one of the reasons markets love stability. Because with stability a government can avoid making popular decisions and spend money on long term infrastructure. For instance in this particular case, its easy to see that spending on irrigation and reducing dependency away from monsoons is the way. The same money which is being given in knee jerk reaction can buy a lot if spent cautiously in a planned manner. Do you know what 22 Billion USD buys?

Since we hear numbers like 22 Billion USD in waivers, the scale sometimes is lost. So here is a comparison.

• Chandrayan-2 was 0.12 Billion USD, Mangalyaan was 0.075 Billion USD
• Statue of unity is 0.4 Billion USD.
• Longest railway bridge in India, the Bogibeel bridge was 0.7 Billion USD.
• Hyderabad metro and Navi Mumbai international airport are 2.5 Billion USD each
• Golden Quadrilateral project was 6.5 Billion USD.
• Sardar Sarovar Dam on Narmada was 8 Billion USD
• Polavaram irrigation project in Andhra is about 8 Billion USD
• Dubbed as World's biggest irrigation project, the Kaleshwaram Lift irrigation project in Telangana which impacts 13 districts irrigating 1800 thousand acres directly and 1700 thousand acres indirectly, via 1800 KM of canal costs 11.5 Billion USD. So in the same farm waiver, you could have built two more of these impacting some 7 Million acres. (for comparison Goa is 900 thousand acres and karnataka is 47 million acres)
• Rafale deal is for 9 Billion USD.
• GIFT city in Gujarat was 20 Billion USD
• Cleaning the Ganga under Namami Gange project is 24 billion USD.

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If this topic interests you, you would definitely like to read more, so sharing some indepth article links.

1. Land laws across India : https://www.thehindu.com/features/homes-and-gardens/Land-laws-across-India/article14414630.ece
2. Types of Farm Subsidies: https://www.gktoday.in/gk/farm-subsidies-in-india-overview-of-different-aspects/
3. Food Grain production in India : https://pib.nic.in/newsite/PrintRelease.aspx?relid=176824
4. What is Minimum Support Price: https://vikaspedia.in/agriculture/market-information/minimum-support-price
5. Minimum Support price for food grains : https://agricoop.nic.in/sites/default/files/english.pdf
6. WTO rules on agriculture subsidy : https://www.wto.org/english/tratop_e/agric_e/ag_intro03_domestic_e.htm
7. Farm loan waivers announced in 2017-2018 https://www.bloombergquint.com/business/india-braces-for-surge-in-populist-farm-loan-waiver-schemes#gs.3iauNa0
8. Total Tax Revenue of India: https://www.bankbazaar.com/tax/union-budget-receipts.html?ck=Y%2BziX71XnZjIM9ZwEflsyDYlRL7gaN4W0xhuJSr9Iq7aMYwRm2IPACTQB2XBBtGG&rc=1
9. Kaleshwaram Lift Irrigation project: https://www.financialexpress.com/india-news/rs-80000-crore-worlds-biggest-all-about-the-kaleshwaram-irrigation-project-that-will-make-you-proud-of-telangana/1222115/

Disclaimer :The views expressed here are my own and don't represent the views of any of my employers, present or past.

- Satyarth