BUDGET 2008-09
| Agriculture: Absence of a Big Push | (1-2 ha) was estimated at Rs 50,000 crore, and the one-time settlement relief for other farmers was estimated at Rs 10,000 crore. Initially, there was lot of criticism that the finance minister (FM) did not make provisions for the loan waiver scheme in the |
| S Mahendra Dev | budget. The FM, however, later announced |
What are the implications of the loan waiver announced in the budget 2008-09? How well has the budget tackled the core issues in agriculture?
S Mahendra Dev (profmahendra@gmail.com) is with the Centre for Economic and Social Studies, Hyderabad.
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It may be noted that no one should quarrel with the sentiment that agriculture and small farmers need help because the agrarian economy has been neglected by policymakers. The issue is what type of policies and instruments are needed to revive agriculture. The decision to waive farm loans and debt relief of around Rs 60,000 crore announced in the budget received widespread attention and hogged the media limelight. In this article, we discuss implications of loan waivers for farmers and other proposals relating to core agricultural issues. As shown below, one can be critical of the budget proposals by focusing attention on what the loan waiver scheme does not do. First, there are many exclusions and limitations of the loan waiver scheme. Second, the budget has not given a big push to other core issues like public investment and infrastructure, water management, research and extension, price stabilisation, longterm issues, etc.
1 Loan Waiver Scheme
It was announced in the budget that the total value of overdue loans being waived for marginal (up to 1 ha) and small farmers in the Lok Sabha that in order to settle the burden fully, the entire amount would be provided over three years. It will be releasing Rs 25,000 crore by July 2008. It includes Rs 10,000 crore announced as a part of the third supplementary. The rest will be released as follows: Rs 15,000 crore in the 2009-10 budget, Rs 12,000 crore in the 2010-11 budget, Rs 8,000 crore in the budget for 2011-12. In terms of institutions, an estimated 55 per cent of the package will be for borrowers from cooperative insti tutions, 35 per cent for borrowers from scheduled commercial banks and 10 per cent for borrowers from regional rural banks.
Granting that this is mainly a political exercise, there can be some positive outcomes of the loan waiver, if implemented properly. There is a need to help small and marginal farmers regarding indebtedness. As mentioned by many people, the cost to the exchequer is not a big issue today. With buoyant tax revenues, the government can afford Rs 60,000 crore for a good cause. In fact, some noted that the burden will be only half the announced amount [Bhalla and Jain 2008]. The supporters of the scheme also indicate that this is not much compared to the write-off of non-performing assets to rich industrialists every year. The loan waiver is supposed to bring great relief to almost four crore farmer households (around 20 crore people). Since the government will bear the cost of the scheme, banks will be strengthened and would have cleaned up their books. Small and marginal farmers will be automatically eligible for fresh loans and they will be encouraged to stay with the banking system. Consumption demand due to the loan waiver will have a positive impact on the economy.
However, the negatives in the form of exclusions and limitations outweigh any positive outcomes of the scheme.
According to National Sample Survey (NSS) 59th round data, only 27 per cent of the total farmer households have access to
BUDGET 2008-09
formal institutional credit (one-third of this group also borrows from non-formal sources). In other words, only 2.4 crore farmer households out of the total 8.9 crore farmer households have access to formal credit. This implies that 73 per cent of the farmers either take loans from moneylenders or are financially excluded. Among marginal farmers and scheduled castes and scheduled tribes, only 20 per cent take loans from banks. Therefore, the majority take loans from moneylenders and other informal sources of credit.
The Radhakrishna Committee on indebtedness also indicated that major problem was indebtedness due to informal sources. The committee has not recommended the present loan waiver scheme announced by the government. It underlines the need for mitigating farmers’ indebtedness to moneylenders [GoI 2007]. On the moneylender problem, the prime minister and FM mentioned that those who are outside the institutional credit system could avail of the scheme initiated in 2004 that would allow them to swap their debt with public sector banks. However, it is not clear whether anything has happened to this scheme since 2004. Kerala established a debt relief commission to identify the areas and categories of severe agrarian distress in order to provide relief to all indebted farmers [Ghosh 2008]. The government should have established such a debt relief commission at the national level.
Another exclusion relates to limiting the loan waiver to farmers with holdings up to 2 ha, which excludes many dry land farmers. The agrarian distress is acute in these dry land areas, where the maximum number of suicides has taken place [Swami nathan 2008]. Moreover, the quantum of loans to dry land farmers is much lower compared to irrigated farmers. The cotton farmer in Vidarbha gets a loan of around Rs 5,000 per acre while the grape and sugar cane farmers in western Maharashtra get a loan of Rs 40,000 to Rs 1 lakh. In fact, a large part of the institutional credit is cornered by the medium to large farmers while marginal farmers depend on moneylenders [EPW Research Foundation 2008]. In this way, the present loan waiver scheme is somewhat regressive and skewed in favour of irrigated and big farmers. One suggestion is that instead of putting a cap in terms of hectares, the government should announce a loan waiver to all including moneylender loans and put a cap in terms of money. For example, one can give Rs 5,000 to Rs 10,000 to all indebted farmers from all sources. Thus, even if one were to accept a loan waiver, it could have been done in a much more equitable manner and would have fetched more votes. Such an alternative plan could have helped almost 10 crore farmers [Mahajan 2008].
Other excluded people in the present scheme are tenants, those who have taken loans by pledging gold and those who have already repaid loans. Another problem is that those who will benefit from the loan waiver will not be eligible for fresh bank borrowing until after June 30. In other words, they cannot take fresh loans for the next kharif sowing.
International Conference on Water Resources Policy in South Asia
First Announcement and Call for papers
SaciWATERs, the South Asian Consortium for Interdisciplinary Water Resources Studies, Hyderabad, India announces its first International Conference on Water Resources Policy in South Asia, to be held in Colombo, Sri Lanka, 18-20 December 2008. The conference is organised as part of the Crossing Boundaries project that focuses on education, research/innovation, knowledge base development and networking, in a combined effort to contribute to a paradigm shift in water resources management in South Asia. Its main foci are a critical and constructive engagement with the notion of Integrated Water Resources Management (IWRM), gender and water issues. Researchers from all the countries in South Asia are requested to send their abstracts in the following themes to sreoshi@saciwaters.org
Deadline for submission of abstracts and session proposals
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april 12, 2008
BUDGET 2008-09
The NSS data presented in Table 1 shows 1990 loan waiver of Rs 10,000 crore given that only 4 per cent of households in the by the V P Singh government [Alagh north-eastern, and 19 per cent of house-2008]. Even if the government foots the holds in the eastern region and 22 per cent bill, there will be a moral hazard problem of households in the central region have and future loans and financial inclusion access to formal institutional credit. On will be affected. The borrowers from the other hand, more than 40 per cent of cooperative banks get around 55 per farmer households in the western and cent of the share from the package. As southern regions have access to institu-Vaidyanathan (2008) mentions, it may tional credit. In other words, the loan adversely affect the reform process waiver scheme will benefit states in already undertaken for cooperative banks western and southern regions compared to [GoI 2004]. Political interference may other poor regions. further increase.
Table 1: Indebtedness across Regions (2003, in lakh)
Political Economy
Region Total Indebted % to Indebted % to Farm (Formal Total Farm TotalThe United Progressive Alliance (UPA)
Households and Farm Households Farm Informal) House-to Formal Households government won the first round over the Farm holds Sources Households
opposition. The opposition parties were demanding writing-off farm loans. The
Northern 109.46 56.26 51.40 27.42 25.05 North-eastern 35.40 7.04 19.90 1.45 4.09 FM stunned the opposition by announcing Eastern 210.61 84.22 40.00 39.47 18.74 a loan waiver scheme of an unprecedented
Central 271.33 113.04 41.60 60.81 22.41 scale. Then the opposition started saying
Western 103.66 55.74 53.70 45.59 43.98 that there was no provision for funds in Southern 161.56 117.45 72.70 69.07 42.75
the budget. The FM recently announced in
Group of Union
the Lok Sabha the manner in which the
Territories 1.48 0.49 33.10 0.15 10.14
government was going to finance banks.
All-India 893.50 434.24 48.60 243.96 27.30 Source: GoI (2008a). There is also a criticism regarding the limit of the waiver only for farmers with Moral Hazard Problem up to 2 ha holdings. The government The main criticism of the loan waiver may consider raising the limit and have scheme relates to its impact on future limits to dry land and irrigated land loans and financial inclusion. The real separately. issue is the weakening of credit repay-But the initial victory may be short-lived ment discipline. Of course, we say “moral for two reasons. First, the prime minister may have over-
Table 2: Growth Rates of Agriculture NSDP (in %)
| Growth Rate in NSDP Agriculture | Growth Rate in NSDP Agriculture | stated his defence | |||||||
|---|---|---|---|---|---|---|---|---|---|
| State | 1984-85 | 1995-96 | Rainfed | State | 1984-85 to | 1995-96 | Rainfed | when he indicated | |
| 1995-96 | 2004-05 | % | 1995-96 | 2004-05 | % | that the write-off | |||
| Punjab | 4.00 | 2.16 | 3 | Gujarat | 5.09 | 0.48 | 64 | was a corre c tion of | |
| HaryanaUttar Pradesh | 4.60 2.82 | 1.98 1.87 | 17 32 | Rajasthan Orissa | 5.52 -1.18 | 0.30 0.11 | 70 73 | the previous | gov- |
| Tamil Nadu | 4.95 | -1.36 | 49 | Madhya Pradesh | 3.63 | -0.23 | 74 | ernment’s | failure. |
| West Bengal | 4.63 | 2.67 | 49 | Karnataka | 3.92 | 0.03 | 75 | But the opposition |
| Bihar | -1.71 | 3.51 | 52 | Maharashtra | 6.66 | 0.10 | 83 | can say that the | ||
|---|---|---|---|---|---|---|---|---|---|---|
| Andhra Pradesh 3.18 | 2.69 | 59 | Kerala | 3.60 | -3.54 | 85 | present | govern | ||
| All-India | 3.62 | 1.85 | 60 | Assam | 1.65 | 0.95 | 86 | ment | had | four |
States are ranked by per cent of rainfed area. Source: Planning Commission (2007a).
hazard” and “credit culture” when a loan waiver is given to farmers. We do not say this when it is given to industrialists. However, as the EPW Research Foundation (2008) aptly says, “The loan waiver policy is thus antithetical to the very essence of promoting a healthy and strong financial system” (p 29). It took almost nine years for banks to recover from the
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years to rectify the
previous government’s failures. Why was it done now and not earlier? Second, as mentioned above, there are many exclusions in the scheme. Only a part of the 27 per cent of the farmers who are indebted to formal sources will benefit, if the waiver is implemented properly. In other words, it is going to create discontent among 80 per cent of the farm households. This may backfire for the government if steps are not taken to help them.
2 Big Push Needed
The loan waiver cannot be expected to automatically enhance farmers’ capacity to increase production and incomes. What farmers need most are measures for raising output and good prices for production rather than more credit which, in the absence of viable agriculture, push them back into a debt trap. As several committees mentioned, indebtedness is only a symptom and not the cause of widespread agrarian distress, which should be addressed in its totality. As Sainath (2008b) mentions, “The UPA government’s waiver is no solution to even the immediate crisis, let alone long-term agrarian problems”.
Similar to earlier budgets, some proposals other than loan waivers have been announced in this budget. Agriculture credit is supposed to reach Rs 2,80,000 crore in 2008-09. Every year, the FM announces that credit is doubling or trebling. Even some of the bank officials admit that ground realities are different. There is a lot of book adjustment to fulfil the targets. Small and marginal farmers’ share is less than that of other farmers.
On other proposals, it provides Rs 31,280 crore for Bharat Nirman as against Rs 24,603 crore in 2007-08. Under the accele rated irrigation benefit scheme, a provision is made for Rs 20,000 crore in 2008-09 against Rs 11,000 crore in 2007-08. Other pro posals for agriculture are: Continuation of crop insurance, horticulture mission, irrigation and water resources finance corporation, Rs 14,000 crore under a rural infrastructure development fund. These are all positive measures.
In the last one year, several committees, commissions and working groups have examined the core issues and given several recommendations for the revival of agriculture. The budget proposals did not reflect these recommendations. Some of these committees are: The National Commission on Farmers, National Develop ment Council Subcommittee on Agriculture, Eleventh Plan working groups, steering group on agriculture for Eleventh Plan, Rangarajan Committee on financial inclusion and, Radhakrishna Committee on agricultural indebtedness.
BUDGET 2008-09
For example, the steering group chaired by Hanumantha Rao indicates that there are five sectors that contributed to a decline in agricultural growth since the mid-1990s. These are: Technology, public investment, private investment, area under fruits and vegetables and fertilisers. The group suggests that there is a need for improvement in all these areas in order to achieve 4 per cent growth in agriculture [Planning Commission 2007b].
There are significant regional disparities in agricultural growth. Table 2 (p 35) shows that growth rates in all the states declined during 1995-96 to 2004-05 except in Bihar. The deceleration is the highest in the states with greater proportion of rainfed areas. Agriculture growth in these states was less than one per cent per annum in the last decade. Apart from other centrally sponsored schemes, funds under Rashtriya Krishi Vikas Yojana and National Food Security Mission and state-level funds should be used for reducing regional disparities.
One of the recommendations of the Radha krishna Committee relates to risk mitigation measures. To mitigate the impact of price collapse in cases of commodities not covered by minimum support prices, the expert group recommends a price risk mitigation fund. The expert group also recommends establi shing an appropriate regulatory framework and rules to ensure quality inputs to the farmers. Similarly, the M S Swaminathan Commission also provides several recommendations including a price stabilisation fund.
Economic Survey [GoI 2008b] clearly says that “besides weather-induced fluctuations, output of this sector has been affected due to reduced capital investment and plateauing of yield levels in major crops” (p 181). The National Commission on Farmers also indicates that there is a large knowledge gap between the yields in research stations and actual yields in farmers’ fields. There seems to be a technology fatigue in Indian agriculture. Surprisingly, the budget is silent on research and extension.
Another concern relates to rising food prices in the country. Prices of food articles led by wheat and other cereals, pulses, milk, edible oils are increasing at fast rates in many parts of the country. This is due to both internal and global factors. The budget has not given any indication for controlling food price inflation. There is an urgent need to revive and strengthen the public distribution system.
Public and private investments are crucial for agriculture. During the UPA government’s tenure, investment incre ased from 10 per cent to only 12 per cent of agricultural GDP. Given a low base, a dramatic improvement is needed to enhance income generating capa cities. The FM himself mentio ned that 16 per cent of investment is needed to attain 4 per cent growth in agriculture. Deficiency in agriculture and rural infrastructure is the biggest problem for agricultural development. Of late, there is some improvement in road connectivity and communications but progress in respect of irrigation, technology and markets and other insti tutions is far from satisfactory. Bharat Nirman is a good programme. Funds are small compared to the needs. There should have been massive increase in outlays for agriculture and rural infrastructure by simultaneously improving the delivery systems.
In fact, with large increase in tax revenues and with a budget of Rs 7,50,000 crore, Chidambaram should have given a huge push to the agriculture sector and addressed core issues in much more aggressive way than the measures given in the budget.
3 Conclusions
The farm loan waiver must be seen as purely temporary relief and there must be programmes to improve agriculture. There are many exclusions and limitations to the loan waiver scheme. It is possible that there may be discontent among 80 per cent of the farmer households who are excluded from the scheme. Many farm households are dependent on money lenders for loans and they need help from the government. Of course, one plus point is that the farm loan waiver at least brings the whole issue of agriculture to the centre stage. Given the shortrun and structural long-term problems in agri culture, the budget should have given a large push to core issues like public investment in infrastructure, land and water management including rain water conservation and watershed develop ment, research and extension, price stabilisation etc, to make cultivation viable and profitable. This huge thrust is needed for other core issues so that the farmers do not fall back into a debt trap, needing another loan waiver in the next few years. The finance minister could have attempted this big push to agriculture on the back of buoyant tax revenues.
References
Alagh, Y K (2008): ‘Find the Links’, New Indian Express, March 1.
Bhalla, Surjit S and Sunil Jain (2008): ‘Loan Waiver: What the Real Figures Reveal’, Business Standard, March 11, New Delhi.
EPW Research Foundation (2008): ‘The Loan Waiver Scheme’, Economic & Political Weekly, March 15.
Ghosh, Jayati (2008): ‘Stagnant Sectors’, Frontline, March 28.
GoI (2004): ‘Report of the Task Force on Revival of Cooperative Credit Institutions’, Ministry of Finance, Government of India.
Planning Commission (2007a): ‘Agricultural Strategy for Eleventh Plan’, Government of India, April, mimeo.
– (2007b): ‘Report of the Steering Committee on Agriculture and Allied Activities’.
Sainath, P (2008a): ‘17060 Farm Suicides in One Year’, The Hindu, January 31.
– (2008b): ‘Oh! What a Lovely Waiver’, The Hindu, March 10. Swaminathan, M S (2008): ‘Ending the Debt Trap and Attaining Food Security’, The Hindu, March 3.
Vaidyanathan, A (2008): ‘Farm Loan Waiver: A Closer Look and Critique’, The Hindu, March 6.
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