Farm Loan Waiver and Agricultural Investment

Arindam Banik and Pradip K Bhaumik

The Rs 60,000 crore agricultural loan waiver by the finance minister has rightly generated widespread debate. The reason goes back to farmers’ debt-related distress and even suicides in India. However, the move has been controversial. If the issue is debt- related misery and distress one must ask why it is so. One can not guarantee that the farmers will not borrow next year. More specifically, long run prospects are sacrificed at the cost of short run gains.
It is established now that the farmer-debtor is generally required to repay his/her debt immediately after the harvest is in. This means that the farmer is trapped in a regressive market mechanism in two ways. First, with no other means to repay the debt, he/she is forced to sell the produce immediately after the harvest – quite often to the creditor or to the creditor's agent – probably at a pre-arranged price or in pre-decided quantities.
Second, sale of crops immediately after the harvest means that the farmer-debtor probably receives less for his/her produce than what he/she could have obtained at a later point in time when the market prices stabilize. As more and more farmer-debtors wish to convert their harvest into cash, the crop prices tend to get further depressed.
While all that has been stated above is true of farmers in general, the case of cash crop farmers deserves special attention. Interestingly, farmers who go for cash crops such as tobacco, sugarcane, or cotton are not the typical small farmers.
They are the ones with relatively large land holdings and risk appetite and for them farming is an act of commerce. The anticipated incentives in the output market are the motivating factors for hard work as well as for high input costs. The results are, however, not always as expected.
During harvest time, supply of crops often overshadows demand and thus price goes down. This is due to the pressure created by both formal and informal lenders for loan repayment immediately after harvest.
As a consequence, not only are marginal input costs higher than the marginal revenue, even average input costs are sometimes higher or just marginally lower than the average revenue, leaving little or no cash surplus for loan servicing.
It is hard to generalize a small farm as one with not more than two hectares of land across the whole of India. Physical land under assured irrigation is much more productive than the area with no assured irrigation. Thus a small farmer with less land but assured irrigation may be financially much better-off than another farmer with much larger land holding but no assured irrigation.
Take the case of Eastern India and some parts of Southern India. The basic unit for organizing production in the rural areas is either the farm or the village, depending on the way in which rural society is structured. In this region agriculture is characterized by small farms in alluvial lowlands, too many people on too little land, production largely for subsistence, and a heavy dependence on cereals and other food staples. Farming with simple handheld tools or ploughs pulled by draft animals is very common. Many farmers are owner-tenants and tenants.
Rice, usually grown under wet conditions, is the staple food crop in this region. Controlled irrigation facilities are poorly developed, yields are often low, and double-cropping (planting and harvesting two crops in one calendar year) is not universally practiced. Although high-yield varieties of wet rice have been introduced since the 1960s, this has not increased production as predicted.
In Northern India irrigation schemes have helped stabilize annual yields and increase overall production, but the average rice yield per hectare in the mid-1990s was only about half that of Japan. Nevertheless, Asian countries produce about 90 percent of the world’s rice. China and India alone account for nearly 60 percent of the world total.
The average rice yield is 2.9 tonnes per hectare in India. In comparison, average rice yield is 6.8 tonnes per hectare in Republic of Korea, 6.2 tonnes in Japan, 6.3 in China, 4.3 in Indonesia, and 3.8 in DPR Korea. A central issue is therefore why productivity has remained so low in India particularly in the eastern region despite availability of modern rice technology.
Experts argue that the above differences in yield are due to poor water management. Irrigation, drainage and flood control investments can alter the water regime and in the process the plight of millions of small farmers. In other words, the two issues are inter-related, one with excess water regime and the other with shortage of water regime. Together, they constitute the concept of water management. The high magnitude of poverty in this region is partly explained by poor water management.
Admittedly, achieving food security has been the overriding goal of agricultural policy in India. The introduction and rapid spread of high-yielding rice and wheat varieties in the late 1960s and early 1970s resulted in steady output growth for foodgrains. Public investment in irrigation and other rural infrastructure and research and extension, together with improved crop production practices, has significantly helped to expand production and stocks of foodgrains.
However, success story due to Green Revolution is waning now. Public investments in agriculture are declining, and the annual increment to gross capital formation in agriculture is now lower than in the early 1980s. This trend is same across all states in India, not just the poorer ones. More interestingly, increasing shares of total public expenditure on agriculture are allocated to input subsidies (on fertilizers, electricity, irrigation, and credit, for example), rather than to productivity-enhancing investments such as research and public investment in irrigation. The share of input subsidies in public expenditure increased from 44 per cent in the early 1980s to 83 per cent by 1990. Private investment in agriculture has increased modestly in recent years, but not enough to fill the gap left by the decrease in public spending.
The economy is transforming and in the process this has created shortages in foodgrains in order to fulfill the demand of new high value agriculture –with fast-growing urban incomes. Thus we need investment to create more fertile land and water. Otherwise the success story of green revolution may disappear shortly. Unfortunately, the agricultural loan waiver would hardly be used to create these investments.