By Shariq Us Sabah
Independent India’s tryst with destiny was redeemed nearly 71 years ago when the country started its journey under a socialist prime minister, Jawaharlal Nehru. To tackle the weak economy, Five-Year Plans were introduced, most of which focused on increasing farm income and reducing disguised unemployment in farm and allied sector. But Indias agricultural sector remains crippled with several challenges.
The term Indian agriculture is synonymous with low productivity, loss making, moral hazards, and market failure. About 85% of all operational land holding across the country are below five acres, and 67% farm households survive on an average holding of only one acre. In addition, about 13.9% farmers experience negative returns on crops and end up relying on institutional and non-institutional lending. Surprisingly, these loans are not utilised for farm purposes, with the funds These funds mostly used for health, clothing, social ceremonies, education, non-food items, or to pay back previous non-institutional lending.
Rather than improving the repayment capacity, providing a strong market that offers optimal price for their produce, providing ample insurance on crops, and stabilising and improving their overall income, successive governments have repeatedly turned to loan waivers.
One needn’t be an economist to know that farm waivers are bad economics. For that matter, any loan waiver is bad economics. Loan waivers badly dent the budget estimates and limit the capacity of the State to spend on other welfare measures (which has a multiplier effect). Overall, such populist measures make the state finances unsustainable, but farmers are a strong vote bank, and governments are looking to stay!
The sharp fiscal deterioration and the balance of payments crisis of 1990 is often attributed to the February 1990 loan waiver by the National Front government. Several governments since 1990 have resorted to this populist measure, with all badly deteriorating the fiscal arithmetic of state finances. In todays times, we see a depressing trend of states debts increasing. Debts are an essential part of the States balance sheet, but debts are considered stable only if either the debt to GDP ratio is stable or is declining. India’s debt to GDP ration stands in contrastdebt to GDP ratio is at 20% and is expected to breach 35% in 10 years. Data for fiscal year 2016 suggest that the combined deficit of the states have reached a whopping 3.6% of GDP, which is a 1% rise over the 2.6% recorded in the previous fiscal year.
Are loan waiver still feasible?
Loan waivers promote the problem of moral hazard. For instance, there are many farmers who have the capacity to pay back, but don’t honour their debt assuming that it will be waived off. Also, having received an easy loan, many farmers dont evaluate before investing, and usually end up investing poorly and taking miscalculated risks.
Loan waivers are the symptoms of the big disease that is crippling the Indian economy. The real problem is the populist lending, which has pushed farmers into a debt trap. And often these populist waivers exclude the majority of farmers. A lot of needy farmers dont receive any benefit, forcing many to resort to non-institutional lending.
According to the 2012-13 National Sample Survey Situation Assessment Survey, 48% of agricultural household did not have any outstanding loans. In contrast, it has also been observed that a single family household takes multiple loans. And the UP government’s much-appreciated move to waive Rs 36,000 crore debt in 2017 is yet to show any evidence on reducing farm distress. Similarly, there is no evidence to show the long term benefits of other farm loan waivers.
Taxing farm income has been subject to the seasonal monsoons and the markets. The weather and market risks act as a multiplier effect for farmer woes. Lack of irrigation facilities and the failure of market regulation puts farmers in a tremendously hopeless situation. They are forced to sell their crops to the middlemen. The only thing common under every states APMC Act is that it patronises farmers and benefits the middlemen. While the minimum support price (MSP) has brought relief to some extent, but the unchecked loopholes have left the farmers vulnerable. While agriculture remains a gamble between monsoon and market, it is impractical to tax farm income.
The ideal way to tax farm income is to divide the farm owners into groups on the basis of land holdings. Farmers with small landholding of two or three acres should be exempted from paying any income tax. However, acres have no meaning in agriculture, when the fate of the crop is decided by the monsoon. So, the how can we reduce farmer woes?
Subsidies have backfired; they are poorly targeted, with the larger farmer taking it all. Also there have been cases where the fertiliser companies have benefited from the subsidy provided by the government. Here is where the case for differentiated subsidy must be made; subsidies for irrigated farming must be done away with as opposed to subsidies for rain-fed farming.
The Kelkar Task Force (2002) reported that 95% of the farmers were below the tax threshold and that it was extremely urgent to bring farmers under the tax net. The long-term goal stated by the Kelkar committee was to widen the tax base and also clamp down on those incomes, which are generated from other sources but are reported to be generated through agriculture.
If not loan waivers, then what?
Governments must focus on stopping the madness of loan waivers. Instead, governments should aim to build long-term infrastructure that would make farming self-sufficient. The governments should focus on setting a remunerative price for farm produce. The inclusion of improved technology, and involving farmers in irrigation coverage and crop diversification will help in long run.
The governments big talk on doubling farm income in five years has already been proved a damp squib. It should now instead identify problems pragmatically and refrain from populist policies. Also, the governments must consider bringing the farming sector under the tax net. However, before we start taxing farm income, deficiencies int the agriculture sector should be fixed.
Improved credit, inclusive irrigation facilities, increased knowledge for farmers, inclusion of modern farm techniques, quality seeds, subsidised fertilisers to targeted farmers, and quality and cost competitiveness for farm commodities are of urgent need.
Shariq Us Sabah is a writer and economist.