Loan waivers are not a direct solution to farmers’ problems, they need more e-mandis

For India, the case of growing income inequality deserves particular attention. New World Wealth, a Johannesburg-based firm, released a report in which it claimed India was the second most unequal country in the world, with millionaires controlling 54% of the wealth. In Japan, the most equal country in the world, millionaires control only 22% of the national wealth.

One of the reasons for the increase in income inequality has to do with the heavy dependence on an unproductive agricultural sector: more than 55% of the Indian population still derives its livelihood from agriculture. For example, in potato cultivation, the productivity of an Indian farmer is less than half that of the United States, Germany and the Netherlands. In the case of rice, it is less than half that of the United States and Egypt, and for wheat, it is less than half that of the United Kingdom and Egypt.

Globally, India has the second largest area of ​​arable land (just after the United States), but less than 35% of this land is irrigated. Consequently, during a bad rainfall year, the harvests are poor. The problem is compounded because 83% of Indian farmers, who are marginal and small farmers (someone with less than two hectares of land), cannot afford to understand technology or have the financial power to mechanize. agriculture (which will improve productivity).

Moreover, if we consider the growth rate of agricultural wage rates between 2007-08 and 2010-11, it increased by 12% per year, while in the last three years this incremental growth fell at 0.5% per year. Farmworkers do not have a union to defend their cause, and so at a time when the seventh wages commission is the delight of the government’s babus, the vast majority of the agro-dependent population is becoming poorer day by day (in real terms).

The median annual salary of a farmer in India is around $290, barely two months minimum wage in Mumbai, the commercial capital of India. This has led to an unequal distribution of income in India, with a rural-urban wage gap of 45%, compared to around 10% for China and Indonesia. Some 850 million people still live in rural India. The country has about 260 million people living in poverty and 80% of them live in the countryside.

As an economist, the panacea lies in finding ways to increase farm incomes. Politicians usually opt for a simpler solution – agricultural loan waivers – to win support from farmers. As seen time and time again, the “farmer first” concept provides political mileage. However, the real benefit to farmers will not come from loan waivers. Only 15% of marginal farmers (with less than one hectare of land) have access to formal credit, so loan waiver helps them little. In fact, previous waivers have led banks to reduce credit outlays for smallholder farmers in the next lending cycle, thus decreasing their chances of obtaining formal loans.

Loan waivers actually hurt small-scale farmers, because with less credit outlay from the formal sector, these farmers must increasingly rely on the informal sector. The difference in cost of loan rates between the formal and informal sector varies at least between 30% and 45%, annually. Moreover, loan waivers mainly help the richer and bigger farmers, leaving the smaller ones worse off in the future.

Through our study, titled Farmer Distress: An Analysis of Intervention in Rajasthan and Andhra Pradesh, India Consensus Report, 2018, we show that the real benefit to farmers will come from two interventions – operationalizing e-mandis (online trading of agricultural produce ) and construction of more storage facilities for agricultural production.

Smallholder farmers, due to lack of adequate storage facilities, often sell their produce to village level aggregators (arthiya) from whom they usually take out loans to grow crops at a higher rate. It is impossible for small farmers to secure a place in state storage facilities without political sponsorship, also because small farmers do not grow enough to reserve an entire crate in the warehouses.

Almost 20% of Indian fresh produce is wasted due to storage issues. Due to the lack of storage facilities, small and marginal farmers rarely venture to grow high-value crops. Only 22.22% of marginal farmers (with less than one hectare of ownership) and 23.61% of small farmers (between one and two ha of ownership) grow high-value crops. Our study finds that small and marginal farmers are likely to benefit from switching to high value crops, after which the likelihood of a farmer being poor will be 3-7% lower.

The introduction of e-mandis is also likely to help small farmers. Regulated markets have problems related to small market size, lack of price discovery due to buyer cartelization, and lack of information about product standards.

On the other hand, e-marketplaces ensure a single unified license, online market mechanism and better infrastructure for quality fulfillment. Studies have shown that after the introduction of e-commerce, the modal prices in Karnataka’s e-market saw a much higher increase as compared to the prices of the same product in non-e-mandis. The increase in real terms varies from 1% to 43%. In Karnataka, between 2007 and 2015, there was a 128% increase in the average price in electronic markets, compared to an 88% increase in the average price in non-electronic markets. Coffee traded through electronic bidding fetches a price 4% higher than the price determined by the physical auction in Karnataka. As evidence from Rajasthan suggests, due to the introduction of the electronic market, farmers witnessed a price premium of 13%.

What is needed, however, is to accelerate the spread of e-mandis and other states reforming their agricultural commodity market committee law. For example, since its inception in April 2016 in Rajasthan and up to December 2017, only 2.5% of the total production was traded through the online market. Other states like West Bengal do not want to reform the APMC Act because most of the ruling party (Trinamool Congress) workers are also middlemen in government appointed mandis. The absence of reforms in the APMC law prevents small farmers from selling directly to supermarkets, exporters and agro-processors. The reforms and the introduction of the electronic market will greatly help small and marginal farmers.

In addition, other supply-side interventions, such as electrification of villages, rainwater harvesting, and construction of roads and canals, will help mitigate losses from crop failure. Forgoing agricultural loans can help a political party win an election once. But, for him to win twice, it is important to undertake policy measures that will make a real difference in the lives of poor farmers.

Published by arrangement with The Wire.

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