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Good Initiative

Income support is healthy tonic for smallholder farmers

Instead of farm loan waivers and minimum support price for crops that distort resource allocation and markets, basic income support to small and marginal farmers is a far better state mechanism
Basic income support will bring succor to farmers in times of stress (Photo by Nithi Anand)

Basic income support will bring succor to farmers in times of stress (Photo by Nithi Anand)

There is widespread consensus that there is huge scope to improve the economic condition of farmers. There is perhaps less agreement that the situation has been created because of persistent, usually brazen but also at times insidious urban bias in India’s political economy. As a quick illustration, it would be worth comparing the total income foregone by the central government in concessions in income tax and reduction in Goods and Services Tax with the figure of Rs 75000 crore budgeted as income support for farmers.

The former benefits urban areas, and the latter is considered to be an extraordinary populist favor to farmers by urban people. Throughout some 17 years of this century, farmers have suffered a net loss of close to Rs 5 lakh crore on account of this brazen urban bias, an eminent economist says. He calls the income support offered this year as atonement for the sins of the past 70 years.

Sum and substance

The sum and substance of discussion among erudite people during a symposium recently held in Delhi were this: Indian food and agricultural policies have been made with the “national memory of Bengal famine” in sharp relief. They have been designed for deficit production.

However, we have now entered an era of at least seemingly lasting surpluses. The old policies are simply outdated. Those policies were focused on protecting the urban consumer, and to do that, not only had strict controls on prices but also control on external trade, stocking limits and regulation of internal trade under the Essential Commodities Act.

Governments have not been able to and will not manage to balance the interests of consumers and farmers. Right now, farmers are in distress. Many policy changes are needed to alleviate the distress.

In the first place, complete abstinence from interfering in markets and external trade of farm commodities is vital. Promotion of processing industry is needed for acting as a buffer needed to obviate extremely fast supply response and the resultant Cobb-Douglas type cycles of surpluses and deficits in commodities.

Structural changes needed

Repealing Essential Commodities Act, reducing the vice-like grip of Agricultural Produce Market Committees (APMCs) and permitting multiple markets will make farmers free. Winding down the physical structure of the public distribution system (PDS) to the neediest and remote areas will reduce the burden on the state in these times of surplus, without endangering food security. These indeed were radical ideas, and any likely implementation of which will surely be blocked by a slow-motion bureaucracy and vested interests associated with each of the legislation.

The relative merits of three options often deployed, talked about or toyed with were discussed at length at the symposium. The first is a significant increase in minimum support price (MSP), along with effective procurement network. The second is direct income support. The third is waiver of farm debts.

Three dimensions

There are three distinct dimensions about such options that need to be understood. The first is mass appeal the announcement will have. The second is its operational feasibility. The third is its real impact on the economy.

The loudest sound bytes for or against any of these measures comes from those quarters that have the highest money and muscle power, but that does not make the policies espoused by them any more sensible. So, it is better to look dispassionately at the issues, rather than be overwhelmed by the sound bytes.

Perils of high MSP

The declaration of high MSP — the price at which the government buys produce from farmers — for a crop does two things. If there is credible procurement infrastructure and operations to back the MSP, it reduces the perceived market risk associated with the crop. Secondly, it offers a high economic incentive for growing the crop. Thus, high MSP tends to encourage farmers to devote land and other resources to the focal crop, as opposed to other crops that could be grown in its place.

Consistent high and rising MSP tends to make then the focal crops dominate all other options till one reaches a stage of near mono cropping. This is what has happened in Punjab and Haryana, where MSP-supported rice and wheat have replaced everything else. This was good when we needed more cereals, but not now, when we have a near-perennial surplus of cereals. Hence, high and rising MSP is not a good thing for its eventual and real impact on resource allocation across crops.

Benefiting a minority

Given that in any case, no more than 25-30% of peasants have access to formal institutional credit, debt waiver by its very definition can benefit only a minority. The balance 70-75% farmers are untouched by farm debt waivers since their debt is always from informal, non-institutional sources.

Schemes of interest rate subvention, coupled with this essential kulak bias of institutional farm loans, tends to create an unwarranted arbitrage between the interest rate a kulak pays to the bank and the rate which he can charge to the poorer peasants around him.

Thus all the hype of farm debt waiver schemes is a political brouhaha with little of substance for the small and the marginal farmers.

Better targeting

On the other hand, direct income transfers in the form of income support, which began in this budget, leave scope for better targeting and cause no distortion in price and cost nexus for any crop, and thus remain neutral to resource allocation. Nor can they ever be biased in favor of the kulak. In the first place, he would have more than 2 hectares of land. Secondly, he cannot well be seen queuing up for a mere Rs 2,000 and still pretend to be a pillar of support for his peasantry.

Punjab, Haryana, western Uttar Pradesh and regions around them have been pampered for too long. Farmers there will scoff at Rs 6,000 as being too paltry. Much of the central government used to think that Delhi is all that India is about and almost all the agricultural policy intellectuals in Delhi think that there is no India outside Punjab, Haryana and western Uttar Pradesh.

But when one sees the real situations prevailing in utterly neglected regions from south Rajasthan through Nimar, Marathwada, Rayalseema, Vidarbha to Jharkhand and beyond, one will recognize that providing Rs 6,000 support to farmers with less than 2 hectares of land is a huge support that will contribute to a stabilization of their total income portfolio in times of stress.

And it does seem to be far superior to the ill-implemented MSP and the chimera of debt waivers. Direct income transfer is indeed the healthiest tonic for the economy.

Sanjiv Phansalkar is associated closely with Transform Rural India Foundation. He was earlier a faculty member at the Institute of Rural Management Anand (IRMA). Phansalkar is a fellow of the Indian Institute of Management (IIM) Ahmedabad. Views are personal.


Sanjiv Phansalkar
Sanjiv Phansalkar
Sanjiv Phansalkar is associated closely with Transform Rural India Foundation. He was earlier a faculty member at the Institute of Rural Management Anand (IRMA). Phansalkar is a fellow of the Indian Institute of Management (IIM) Ahmedabad. Views are personal.

1 Comment

  1. ajit grewal says:

    the MSP issue is one which strives to provide the farmer with a remunerative price for a certain number of crops. There appears to be a surplus of agricultural output in the country. In the event that India is short of some or many crops, one solution is to raise the MSP for that or those crops. Clearly there are many other things the Government can do – if it knows or desires to govern. Seeds and related yields is clearly one.
    Whether one system is better or another can only be guessed at. The vagaries of nature , quality of land , availability of timely inputs are some of the variables apart from the market.
    Can the market really be improved in terms of its working. Most likely not for non cereal crops . Unfortunately markets are driven by business man . There is no way that excessive profits will not be made by business man or that they will not try to maximize profits. The seller is far too fragmented and does not have the financial clout and education to make use of sophisticated markets or to produce in a market which has no support prices.
    Tat is the sad fact. So which system of support is better will not be known as more land and people enter agriculture. The real issue is that the Government lack the will and desire to regulate and make agriculture a success. Unregulated agriculture for India should never be worse than overseas prices as that must drive equilibrium – just as it drives it in industry.