The discussion arose out of the news-story in THE HINDU on Rahul Gandhi promising farm loan waiver in Gujarat.
Panellist 1: Actually agriculture is a pretty complex system and conventional market solutions do not appear to work. Gluts and shortages are inevitable – bad weather is a risk; good prices lead to excess cultivation next year and resultant drops, and vice-versa; global supply shocks and resultant price fluctuations are always round the corner; poor storage and other forward linkages make farm sales the only option etc. Pain and suffering follows.
Developed countries, over decades, have sought to address this problem through less distorting approaches – mainly crop insurance and/or direct payments. It helped that they have good irrigation systems, farms are bigger, forward linkages are better, credit access simple, and markets are functional.
We have none of the positive conditions, and crop insurance and direct payments are both very expensive and run into problems of effective administration.
But we have this smorgasbord of inefficient and distorting things – subsidised crop loans and their recurrent waivers; procurement and MSP (which feeds into the PDS); fertiliser subsidy; free farm power; agriculture IT exemption; minor irrigation programs like PMKSY etc. Worse still, each one has generated its set of powerful entrenched interests, which reflexively gang up as a vocal electoral constituency whenever they are threatened. Making matters complex, it cannot also be denied that each one of these, in their very sub-optimal ways, contributes to mitigating, even if partially, the fundamental problem, and the resultant pain and suffering.
So we have a very bad self-reinforcing and perpetuating equilibrium. A ‘chakravyuha’, from which exits appear very daunting…
I just have not come across anything satisfactory as a path out of this. Except the gradual process of development – build irrigation systems, transition people out of agriculture, consolidate farms, let linkages and markets develop etc. – and the gradual introduction of things like crop insurance. In this dismal environment, doubling farm incomes may well be the government’s most over-optimistic promise yet.
Panellist 2: Thoughtful response. I doubt if there is much to add to what you have written, since it encompasses all angles – what needs to be done, what is feasible, what needs to be worked on and what is the role that even the so-called sub-optimal solutions play in mitigating the seemingly insurmountable issues surrounding agriculture in India compounded by India-specific issues.
May be, one small thought. You say that ‘Crop insurance is expensive’. So, instead of these expensive and recurring farm loan waivers – won’t it be a more effective application of government subsidy if the government were to bear the premium. Of course, government paying premiums to, say, a private insurance entity attracts all kinds of criticisms. But, can one design it to be ‘as above board as is possible’ and pay the premium?
Panellist 1: Among all the solutions I think what you are suggesting may be one of the best options. Given that the crop insurance scheme is one of the government’s bigger initiatives, and one of the most progressive (as well as efficient), I think they should actually spend more energies and resources on it. Premium support will always entail big subsidies and this may be worth paying. Can the government think of phasing out some of these other subsidies and phasing in more of crop-insurance support? For example, it could encourage states which are willing to do farm power metering and a low agricultural tariff (to start with), to be provided a much higher premium support subsidy…
Panellist 2: I am glad that, preliminarily, you seem to find the idea the most practicable. As you had written, it can be tied to some other improvements (better not call them ‘reforms’).
Panellist 3: There is one optimistic scenario where farm incomes can double despite a continuing economic mess in the sector. That is if something like 1965-70 happens in terms of technology. Dryland agriculture –untouched by the earlier Green Revolution–now has some promising yield enhancing techniques which are not fully ‘extended’; similarly the SRI system offers large benefits in paddy cultivation. In both cases, the broken agricultural extension machinery is not able to propagate them adequately–whereas in the 60s/70s the extension system worked. Similarly, a quick expansion of the cold chain can quickly increase the share of income going to farmers and reduce their vulnerability by giving them staying power. These do not require politically difficult measures–just good administration but that is not easy either.
On crop insurance, there is an interesting idea from Dr. Ramesh Chand, member NITI–he suggests abolishing it (in its present form), instead announcing free government subsidies when crop losses occur, in an amount equal to what would be given under crop insurance. No time to discuss it here, but in terms of fiscal outgo, his calculations show it can actually reduce costs, by eliminating the transaction cost of dealing with ALL farmers and replacing them with dealing only with those who make losses. He makes the point that for the same overall fiscal cost, Govt. can give it ‘free’ and earn brownie points rather than appear to collect a premium that is a fraction of the actuarial cost. It would also help reduce the rampant insurance frauds that are witnessed in some States.
Panellist 1: About SRI, I am not sure. It has been around for long. The last I heard was that it had expanded but not by much. Also, it has been heavily researched and the evidence has been mixed
Panellist 2: One quick comment: “announcing free government subsidies when crop losses occur, in an amount equal to what would be given under crop insurance.”
If a government compensates only one set of farmers and not others, no matter how objectively done, will it be accepted without protest? All farmers, for example, now want loan waivers, regardless of whether they are distressed. The Madras High Court backed them, in Tamil Nadu!
If an insurance company pays out on the basis of verified loss claims, it is far less controversial. My two cents worth.
If you noticed, the emphasis is on risk management and risk mitigation. How to design and a run a system of insurance, taking Indian context and potential difficulties – political and administrative – into account. But, crop insurance has to be a priority.