The policy options to address farm crisis
NEWDELHI:THE rural economy and farm distress will be leading themes of the coming elections. Here’s a primer on the key issues with a focus on facts, economic analysis, and policy options. the economic cost (without subsidies), 35% of farmers would have made a loss. Finally, if we value farmers’ labour on their farms at the local wage, then 76% would make a loss. Thus, the effective earnings from farmers’ work on their own farms is considerably lower than the market wage.
Third, the status quo is ecologically unsustainable in many parts of India. Estimates from the Central Ground Water Board point to a 61% decline in groundwater levels in India between 2007 and 2017. This is in part the result of free or highly-subsidized electricity to farmers who then plant water-intensive crops in areas that are already water scarce. The large declines in groundwater suggest that this model is unlikely to be sustainable. Finally, the status quo is fiscally unsustainable. The fiscal pressure of subsidies, price supports, and loan waivers is so severe that a senior government official recently remarked to me that “it would be cheaper and better for the country to just pay (economically unviable) farmers to not grow anything rather than subsidising economically and ecologicallyunsustainablecultivation.” in productivity-enhancing technologies and accelerating their adoption, and reducing risk for farmers through ex-ante crop insurance based on rainfall (that does not affective incentives for effort) rather than ex-post loan waivers (that penalise responsible borrowers).
These points are obvious to most economists, and have been made in official documents such as the Economic Survey 2015-16. However, we have to accept the reality that the political process will focus on short-term farmer welfare and votes. Indeed, this is a leading reason for why we are where we are. Thus, it is essential to design policy options that both alleviate farmer suffering in a visible manner, and facilitate the structural transformation above.
One promising way of doing this is to direct all additional budgetary allocations for loan waivers and MSP increases (both of which disproportionately benefit rich farmers and create perverse incentives) to direct income transfers to farmers. The good news is that the political success of the Rythu Bandhu Scheme (RBS) in Telangana has prompted both other states like Orissa and the central government to adopt a similar approach.
The next step will be for the central government to design a “grand bargain” with states whereby it calculates the total economic value of subsidies that different states are getting and then offers states the option of accepting a fiscally-equivalent lump-sum transfer in lieu of the subsidies. This will enable states to increase the value of the income support offered to farmers in lieu of subsidies. Over time, it may make sense to provide such transfers regardless of whether cultivation takes place. This will facilitate marginal farmers for whom cultivation is unprofitable to use the income to engage in other more productive economic activities. Receiving reliable income transfers for marginal lands (and facing the true economic cost of inputs) will also increase the likelihood that farmers lease out land for more productive uses.
Such a grand bargain will also give states the fiscal and policy space for other innovative reforms. One promising example is Punjab’s recent Paani bachaao, paisa kamao (Save water, Make Money) scheme (being designed and evaluated by JPAL). Farmers continue to get free power as before, but if they consume less than a benchmark (based on average usage in prior years) they get the subsidy amount transferred into their bank account. This is good politics because farmers cannot be worse off, and water conservation earns them money. But it is also excellent economics because farmers now consider the correct price of water in their decisionmaking and have incentives to conserve water.
The combination of low productivity, economic unviability, and fiscal and ecological burden of subsidies is taking Indian agriculture close to a breaking point. Sustainably improving farmer welfare requires a clear understanding of the issues outlined here, a single-minded focus on improving productivity per worker, and economically sound policies that farmers can see as being beneficial to them. The success of the RBS and its rapid replication suggest that unleashing the creativity of states through a grand fiscal bargain between centre and states may be a promising option for improving agriculture policy and outcomes.