Loan waivers bring temporary relief to farmers, but challenges run much deeper

The sector is hobbled by price and crop risk

Women sort nuts outside their home in the village of Kuragunda in Karnataka, India. Prashanth Vishwanathan/Bloomberg

Sanjay Kaul, the managing director and chief executive of National Collateral Management Services Limited, a commodity services company in India, talks about the distress in the country's farming sector.

What are the major challenges that India faces when it comes to farmers' issues?

Crop risk and price risk are the two fundamental sources of farmer distress in India. Factors exposing Indian farmers to crop risk include wide scale dependence on erratic monsoons, which are being impacted by climate change, lack of technological know-how on best farm-practices and farm mechanisation and small and fragmented land holdings, with phenomenon of declining average farm holding size.

Can you explain why famers struggle to get the right price for their crops?

The issue of price risk is more complex involving multiple factors. Indian farmers have poor access to information on market dynamics. This incapacitates them to take rational crop decisions at time of sowing. Price discovery through derivatives is also poor. While domestic exchanges currently offer over 50 commodities across various segments, the number of contracts listed on the exchange for agricultural commodities continues to be low.

What are the other problems?

A bigger problem is the huge shortage of storage facilities in rural areas which forces the farmers to resort to distress selling. This prevents farmers from realising a remunerative price for their produce and traps them in a cycle of poverty.

What are your thoughts on how the Maharashtra government responded to the recent farmer protests?

A key demand of the Maharashtra farmers was the waiving of crippling farm loans as was promised by the BJP [ruling party] before state elections in 2014, besides adequate compensation for failed crops and individual and community land rights for forest dwellers. Up until now, only one-third of farmers in the state had been given waivers. Even though waiving off loans for the remaining two-third of farmers will be a temporary relief for them, such one-off compensation scheme is a highly unsustainable solution to farmer distress and detrimental to the economy’s resources.

What impact could this have?

The mid-year economic survey (the 2016-17 mid-year report presented in parliament providing details on India's economy that was released in August 2017) warned against farm loan waivers stating that if all states start offering them, the total burden could swell to 2.7 trillion rupees. Rising incidence of loan waivers has made it difficult to disagree with the fact that agricultural credit is being used as more of a political instrument rather than developmental.

Do guaranteed minimum prices for crops help?

Announcing minimum support prices is of no avail without a sound, action oriented implementation framework. To offer price assurance to as many farmers as possible, it is necessary to engage credible private sector agencies. The role of the private sector will be a key component of market driven and sustainable system that does not put an onerous burden on the exchequer. Besides, the role of agricultural risk mitigation through well-designed, farmer friendly weather based crop insurance schemes, steps towards improving productivity cannot be ignored.