Higher prices could lower clamour for farm loan waivers
Falling prices had put farmers in various parts of the country on the warpath for several months.
In some cases, prices of commodities have even fallen below the basic cost of production.
Increased supplies pulling down demand and causing a price crash is not new. But as the Economic Survey Part-II, released in August, pointed out, the impact in 2017 was greater due to a variety of factors that included imperfect markets.
The slump had ignited calls for waivers of farm loans and five state governments had announced waivers in some form or the other. The total expenditure of these, some experts said, would be about ~1-1.5 lakh crore. Assuming more states adopted such waivers, the expenditure could rise to more than ~2.7 lakh crore. The Survey had also highlighted this.
The cost would be almost double the annual subsidy on food for 2017-18, and would make it many times more than the budgetary allocation for the ministry of agriculture.
There are opinions in favour and against farm loan waivers. Some argue such a measure could give temporary relief to farmers suffering due to two consecutive droughts and a big fall in farm-gate prices. But others say the ill- effects of such a measure could have a debilitating impact on the economy.
“You can’t ignore farm loan waivers because it will ensure that the farmers, particularly small and marginal ones, are brought back into the formal credit system. Also, it must be recognised that there is a crisis in the agriculture sector and we shouldn’t take a narrow view of it,” former chairman of the Commission for Agriculture Costs and Prices (CACP) T Haque told Business Standard.
Haque was one of the main drivers behind the farm loan waiver scheme announced by the newly elected Amarinder Singh government in Punjab.
Referring to the argument that a more comprehensive structure of supplementing farmers’ income be considered instead of waivers, he said this was not good enough, as the impact of minimum support prices (MSPs) was limited to some crops. “Why are issues like vitiating the credit culture, etc, not seen when corporate loans worth crores are just written off?” Haque asked.
There, too, reports showed gross margins were not big enough when compared with the average weighted comprehensive cost of production (C2). Comprehensive costs include all paid out expenses, plus the imputed value of unpaid family labour, along with rentals and the interest foregone on owned land and fixed capital.
The Centre estimates margins by comparing these with A2+FL (projected costs, which includes all paid out expenses in cash and kind, along with the derived value of unpaid family labour).
Even with this yardstick, of the 17 crops whose MSPs were announced for the 201718 kharif season, gross margins or returns to farmers of only three were 50 per cent more than their average weighted cost.
Gross margins have not always been commensurate with the average weighted cost. Between 2008- 09 and 2010-11, the net rate of return in percentage terms in relation to C2 for most kharif crops was below 30 per cent, except for sesame and cotton. The reruns were, however, better when compared with gross rate of return over costs, as measured by A2+FL.