January 7, 2019 / 2:57 AM / 13 days ago

Breakingviews - India Insight: Farmers are too big to fail

MUMBAI (Reuters Breakingviews) - Farmers hold the key to Narendra Modi’s second term. To stand a chance of winning a general election to be held by May, India’s prime minister is under pressure to appease those left desperate by crashing crop prices. Two-thirds of the country’s 1.3 billion people live in the countryside, and almost half of the workforce depends on agriculture. Their anger is one reason the ruling Bharatiya Janata Party was bruised in recent state polls. New Delhi may need to act fast. 

A farmer spreads fertizer mixed with potash in his paddy field on the outskirts of Ahmedabad, India, July 13. 2017. Picture taken July 13. 2017. REUTERS/Amit Dave

One thing is painfully clear: the masses are being squeezed. Protests are getting bigger and noisier. Drought, delays in distributing government support and a 2016 ban on large banknotes have all contributed to a collapse in rural income growth from an annual pace of 18 percent in the four years to March 2014 down to 5 percent in the subsequent period, according to economists at Ambit, a local brokerage.

They point out that when rural distress coincides with national polls, the incumbent government almost always loses. Indeed, a promise to write off the borrowings of farmers helped Rahul Gandhi’s opposition Congress party unexpectedly eclipse the prime minister’s right-wing nationalist team in state elections late last year, casting doubt on Modi’s prospects of winning a second five-year term.

Loan waivers are a common feature of India’s campaign trail. Politicians on both sides have announced these to a tune of almost $25 billion since April 2017, or up to one-fifth of regional budgets, analysts at Edelweiss Securities calculate. Yet Modi is now slamming such measures as “lollipops”, or a sugar hit which doesn’t last. 

The debt issue is complex. Farmers can get bank loans at lower interest rates than ordinary borrowers. However, the amounts are insufficient and so small cultivators, which make up the majority, also turn to money lenders, who charge interest up to 60 percent per an annum, almost nine times the Reserve Bank of India’s policy rate. That means official waivers alleviate only some pain: formal access to credit just gets harder and black-market obligations remain. 

Yet the cost of growing fresh produce is rising, thanks to overuse of both chemicals and natural resources, which has damaged soil quality. Meanwhile, messy regulation, low levels of investment and inadequate infrastructure, including a severe shortage of cold-storage facilities, mean that most farmers don’t have direct access to consumers, and end up with scant control over price. 

While many ordinary Indians and international investors are thrilled with relatively low levels of consumer price inflation, Reuters journalists Rajendra Jadhav and Mayank Bhardwaj have described farmers dumping onions on the road after prices plunged to as low as one rupee per kilogram, for a crop which costs eight times that to produce. It’s a similar story for potatoes, another staple.

The strain leads many to quit the field every day. Those that dislike their profession complain of high risks, poor income, and say they see no future. Desperation leads to other troubles: in Maharashtra, a wealthy but vast state with drought-prone areas, around 37,000 agricultural workers and farmers have ended their lives over the decade to end 2015, National Crime Records Bureau data shows. 

RADICAL SOLUTION

The question then is how to make life better in the countryside. Andhra Pradesh, led by tech savvy Chief Minister Chandrababu Naidu, has set a target to convert the state to “zero-budget natural farming”, a technique which cuts out costly chemicals with the aim of making the occupation economically viable. 

The ambitious plan is backed by French bank BNP Paribas. Also partnering with the state is the foundation of Azim Premji, the billionaire chairman of IT outsourcer Wipro. But those that have successfully made a similar switch warn any plan to give up chemicals requires substantial educational and financial support as the transition can take years. 

Rajnish Kumar, the chairman of State Bank of India, the country’s largest lender, argues instead of loan waivers, an income distribution scheme may be a better way to provide immediate relief. He cites an arrangement already in place in the state of Telangana, where the local government gives land-owning farmers a direct cash benefit each season to help pay for inputs. This basic income safety net may be a better bet for Modi.

Arvind Subramanian, a former economic advisor to the prime minister, argues Telangana’s scheme could evolve into something fiscally sustainable if it replaced some, or all, of New Delhi’s existing handouts, from crop insurance to fertiliser subsidies. The latter alone adds up to about 0.6 percent of GDP. It could also be progressive, he argues, if a fixed sum was contingent on simply being a farmer, rather than a per-acre payment to just landowners.

Taking the Basmati rice-producing state of Punjab as an example, Subramanian reckons that eliminating the fertiliser and power subsidy would finance the annual transfer of 50,000 rupees ($721) to every agricultural worker, or roughly one third of the estimated median agricultural household income in the state in 2013.

The ultimate, long-term solution is to make farming sustainable, and to have fewer farmers. Currently, almost half of the workforce is dependent on an industry generating barely 17 percent of GDP, with labour productivity less than one third of China’s. That structural imbalance is arguably the most worrying employment statistic for a young and growing population that needs a million new jobs a month. Handouts will help win an election. Afterwards, India’s rural masses will still need tending.

Breakingviews

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