Mitras Analysis of News : 17-6-2017

Undoing the gains (The Hindu)

Undoing the gains (The Hindu)

 Synoptic line: It throws light on the fact that loan waivers might help the government buy peace with farmers in the short run, but they are unlikely to change much on the ground. (GS paper III)

Overview

  • Loan waivers have fiscal costs. They can not only increase the deficit and interest burden, but also limit the ability of the government to undertake capital expenditure. Lower capital expenditure affects longer-term growth prospects, including that of the agriculture sector.
  • Loan waivers in the past have failed to address intended outcomes. Addressing the problems in the agriculture sector means solutions that go beyond loan waivers. In the absence of long-term planning and vision, the stress in the sector will keep resurfacing.

Need of loan waiver

  • Uttar Pradesh and Maharashtra governments have announced farm loan waivers, while farmers are demanding the same in Madhya Pradesh. Due to the unfortunate erratic monsoon behaviour, farmers are facing problems of severe drought for the past few years.
  • Without repaying debts, farmers will not get fresh kharif credit. This is why they want loan waivers as well as remunerative procurement price.

Effects of loan waiver

  • If the government pays off the loans taken by the farmers, the government expenditure on development of the state in long run will be affected. This will have an impact on the progress and infrastructural development of the state.
  • Loan waivers can affect the flow of credit as bank lending tends to move away from areas with greater exposure to such schemes.
  • It creates distortions in the credit market, as repeated waivers incentivise default, which can affect the flow of credit to the sector in the medium to long run.
  • Policies like farm loan waivers do not address the fundamental problems of Indian agriculture sector and if major agricultural states resort to such schemes, the impact on consolidated fiscal deficit could be 1 to 1.3 per cent of GDP, according to a report.
  • According to Kotak Institutional Equities, such policies create moral hazard problem leading to expectation of such waivers and inducing demonstration effects at national level.

Analysis

  • The real crisis for Indian farmer is that he or she is not in control of the produce, unlike other businesses, and is dependent on cartel of traders to fetch a decent price. The cartel makes money in case of good or bad crop season as their margins remain intact. In fact, in case of a crop failure the trader profit margin rises whereas the farmer is in distress without remunerative price.
  • The governments both Centre and states have repeatedly failed to break the cartelisation and their effort to create farm infrastructure through cold stores has helped the corporate sector more than the farmers.
  • Except some farmers in Maharashtra and Punjab, most of the cold stores built with help of the government subsidy are owned by corporate. So, now these corporate are buying produce in farms at cheap rates, keep them in cold stores, repackage them and sell them in malls in cities at thrice the purchase price. Neither the farmer gains nor the consumer.
  • But, when we buy Washington apple from a mall in Delhi or Mumbai, a huge chunk of the price directly goes to the farmer in northern America, whom the local government has empowered with farm to market technologies. In India, such an effort is limited to parts of Maharashtra and Madhya Pradesh, where the state governments have set up companies having thousands of farmers giving them power to bargain a price for their produce.

Way ahead

  • The farmers need support and the society has to evolve a sustainable method. It should keep prices and wages in check and also spur economic growth. Benevolent farm policy is accepted as the best way to spur demand and industrial growth.
  • Whenever the Central government breaches the fiscal norms, it should secure parliamentary approval. State governments must be encouraged to adopt a similar practice by securing the approval of the State Legislature.
  • Regulatory measures can be devised to enable bond yields to be responsive to market signals and bridge the information asymmetry between markets and State finances of the concerned State governments.

Question: Loan waiver should not become the method of improving economic viability of farming. There is a need to find a way to stabilise the income of farmers. Critically analyse.

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