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Advantages of Income Transfer Policy for Agri Sector

Advantages of Income Transfer Policy for Agri Sector

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  • GS 3 || Economy || Agriculture || Agricultural Credit

Why in news?

  • An income transfer policy combined with direct cash transfer is the best way to help the farmer.

Continued decline in food prices

The most pressing problems facing the Indian farmer are the persistently low market prices.

  • Ideally, the solution lies in holistic and broad-based agri-market reforms.
    • the stranglehold of the Agricultural Produce Marketing Committees (APMC) needs to be broken
    • the Essential Commodities Act (ECA of 1955) requires reforms
    • the negotiable warehouse receipt (NWR) system has to be scaled up
    • value-chains — based on the Amul model — are needed for most crops
    • land laws need to be less restrictive
    • contract farming should be promoted and
    • agri-exports are in need of a conducive environment to grow.
  • However, these reforms entail a long gestation period and with persistent decline in rural food and beverages prices, demands for quick-fix solutions are increasing.

 Quick-fix solutions

Three significant solutions have been doing the rounds:

  • Higher minimum support prices (MSPs)
  • loan waivers, and
  • direct income/investment support

We evaluate the three to identify one that can be a winner, both politically and economically:

  • for political acceptance, we evaluate the scheme for its reach among the targeted beneficiaries, the farmers, and
  • for economic viability, we compare costs and benefits

 Higher MSPs

  • Congress promised higher MSP for paddy (Rs 2,500 per quintal) in Chhattisgarh and loan waivers in the three states where his party emerged victorious. It is quite likely to take this model to the Lok Sabha elections.
  • Similar promises by the Prime Minister during campaigning for the UP assembly elections in 2017 led to gains for the BJP. The PM promised a loan waiver and higher MSPs for 23 commodities.
  • There was a difference, however, in the MSP increase formula offered by the two parties.
    • While the Congress promised an MSP increase of 50 per cent over C2 that is, the comprehensive cost,
    • PM promised the same increase over A2+FL, that is the paid-out costs plus family labor
    • It may be noted that C2 is about 38 per cent higher than A2+FL.
  • The irony of a MSP policy is that it pertains to a limited number of farmers.
  • As per NSSO 2012-13, less than 10 per cent of the country’s farmers sold their produce at.

  • MSPs
  • Moreover, MSP operations mostly benefit large farmers who have marketable surplus; these operations exclude much of country’s marginal farmers who produce little surplus.
  • Besides, the large inefficiencies and market distortions caused by a MSP-regime make it an unfavourable choice.
  • For example, even now, wheat and rice stocks with the government (45.4 MMTs) are more than twice its buffer-stock norms (21.4MMTs), reflecting massive economic inefficiency, not counting the leakages and corruption in the MSP operations of procurement, stocking and distribution.

Loan waivers

  • As per NABARD’s Financial Inclusion Survey (NAFIS), between July 2015-June 2016, 43.5 per cent of all agri-households took loans.
    • Of these, 69.7 per cent took institutional loans — 60.5 per cent took only institutional loans and 9.2 per cent took both institutional and non-institutional loans (See Figure 1).
    • This means that about 30.3 per cent (69.7 per cent multiplied with 43.5 per cent) of Indian agri-households took loans from institutions.

  • A loan-waiver is thus likely to benefit only this 30 per cent — even a subset of it, if conditions are imposed on loan waiver schemes. The remaining 70 per cent of Indian farmers, who do not access institutional credit, will not benefit from this scheme.
  • The conclusion, thus, is that
    • through higher MSPs or through loan-waivers, one cannot reach more than 20 to 30 per cent of Indian farmers
    • this limited reach, therefore, cannot redress the widespread grievances of Indian farmers

Direct income/investment support

The third option, pioneered by the Telangana government is income/investment support through the Rythu Bandhu Scheme (RBS).

  • Telangana started RBS in May 2018, whereby it gave Rs 4,000 per acre to every farmer. This transfer is made twice a year, coinciding with the two cropping seasons.
  • By directly giving cash, the government aims to support the input purchases of farmers. The scheme is said to have reached almost 93 per cent of landowners and has clearly yielded political benefits to the TRS – the party won a landslide victory in the elections to the Telangana assembly.
  • In terms of costs,
    • our estimates show that a national farm-loan waiver is likely to cost about Rs 4 to 5 trillion
    • an RBS-style income transfer is likely to cost about Rs 2 trillion (with some improvisation to include tenants, and restrictions to the actual cropped area)
    • a price-deficiency based payment or actual procurement under MSP operations, if done at a large-scale, is going to cost about Rs 1 to 1.5 trillion (depending on whether market prices are 20 per cent or 30 per cent below MSP). Such operations, of course, are likely to be prone to large-scale corruption
  • Even then, MSP policy and loan waivers are much more distortionary than income/investment support policy.

Way forward

A cost-sharing arrangement between the Centre and states is required to bear such a burden. Eventually, an income transfer policy should be combined with direct cash transfer in lieu of fertiliser and power subsidies to make the policy meaningful.

Additional info

Krushak Assistance for Livelihood and Income Augmentation (KALIA) scheme, which has been started by the Odisha government, provides income transfer on the basis of households as unit. The payout at Rs. 10,000 per family per year also extends to sharecroppers and landless agricultural labourers.

Mains question

MSPs and Loan waivers have been unable to tackle the structural challenges of the farm sector. DIscuss. Explain how income transfer schemes can help alleviate farm distress in India.