The Rs 60,000-crore agricultural loan waiver by the Finance Minister has generated widespread debate. The reason goes back to farmers’ debt-related distress and even suicides. If the issue is debt-related distress, one must ask why it is so. There is no guarantee that the farmers will not borrow the ensuing year. More specifically, long-term prospects are sacrificed at the cost of short-term gains.
It is established now that the farmer is generally required to repay his/her debt immediately after the harvest. This means the farmer is trapped in a regressive market mechanism in two ways. First, with no other means of repaying the debt, he/she is forced to sell the produce immediately after the harvest — quite often to the creditor or to his agent — probably at a pre-arranged price or in pre-decided quantities.
Second, the sale of crops immediately after the harvest means that the farmer probably receives less for his/her produce than what he/she could have obtained when the market prices stabilise. As more and more farmer-debtors wish to convert their harvest into cash, crop prices tend to get further depressed.
Act of commerce
While all this is true of farmers, in general, the case of cash-crop farmers deserves special attention. Interestingly, those who go for cash crops such as tobacco, sugarcane or cotton are not typical small farmers. They are the ones with relatively large land holdings and risk appetite, for whom farming is a commercial operation. 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, the supply of crops often overshadows demand and, thus, prices go down. This is due to the pressure created by both formal and informal lenders for loan repayment, post-harvest. As a consequence, average input costs are sometimes higher, or just marginally lower, than the average revenue, leaving little or no cash surplus for loan servicing.
Small farms
It is hard to generalise 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 better off than another farmer with much larger land holding but no assured irrigation.
Take the case of eastern India and some parts of the south. The basic unit for organising production in the rural areas is either the farm or the village, depending on how rural society is structured.
In this region, agriculture is characterised 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 animals is common. Many farmers are owner-tenants and tenants.
Rice, usually grown under wet conditions, is the staple food crop in these regions. 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 practised. 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 stabilise 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 per cent of the world’s rice. China and India alone account for nearly 60 per cent of the world total.
Low productivity and water management
The average rice yield is 2.9 tonnes per hectare in India. In comparison, the average rice yield (in tonnes per hectare) is 6.8 in the Republic of Korea; 6.2 in Japan; 6.3 in China; 4.3 in Indonesia; and 3.8 in DPR Korea.
The key issue is: Why has productivity 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 a result of 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. 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 food grains.
Public investment in irrigation and other rural infrastructure and research, together with improved crop production practices, has helped significantly increase food grains production.
Declining investments
However, the benefits of the Green Revolution are waning now. Public investment in agriculture is declining, and the annual increment to gross capital formation is now lower than in the early 1980s.
This trend is the same across all the States, not just the poorer ones. More interestingly, the 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 rose 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 is nowhere near enough to fill the gap caused by the decrease in public spending. Unfortunately, the agricultural loan waiver can hardly be used to create these investments.
It is established now that the farmer is generally required to repay his/her debt immediately after the harvest. This means the farmer is trapped in a regressive market mechanism in two ways. First, with no other means of repaying the debt, he/she is forced to sell the produce immediately after the harvest — quite often to the creditor or to his agent — probably at a pre-arranged price or in pre-decided quantities.
Second, the sale of crops immediately after the harvest means that the farmer probably receives less for his/her produce than what he/she could have obtained when the market prices stabilise. As more and more farmer-debtors wish to convert their harvest into cash, crop prices tend to get further depressed.
Act of commerce
While all this is true of farmers, in general, the case of cash-crop farmers deserves special attention. Interestingly, those who go for cash crops such as tobacco, sugarcane or cotton are not typical small farmers. They are the ones with relatively large land holdings and risk appetite, for whom farming is a commercial operation. 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, the supply of crops often overshadows demand and, thus, prices go down. This is due to the pressure created by both formal and informal lenders for loan repayment, post-harvest. As a consequence, average input costs are sometimes higher, or just marginally lower, than the average revenue, leaving little or no cash surplus for loan servicing.
Small farms
It is hard to generalise 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 better off than another farmer with much larger land holding but no assured irrigation.
Take the case of eastern India and some parts of the south. The basic unit for organising production in the rural areas is either the farm or the village, depending on how rural society is structured.
In this region, agriculture is characterised 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 animals is common. Many farmers are owner-tenants and tenants.
Rice, usually grown under wet conditions, is the staple food crop in these regions. 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 practised. 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 stabilise 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 per cent of the world’s rice. China and India alone account for nearly 60 per cent of the world total.
Low productivity and water management
The average rice yield is 2.9 tonnes per hectare in India. In comparison, the average rice yield (in tonnes per hectare) is 6.8 in the Republic of Korea; 6.2 in Japan; 6.3 in China; 4.3 in Indonesia; and 3.8 in DPR Korea.
The key issue is: Why has productivity 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 a result of 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. 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 food grains.
Public investment in irrigation and other rural infrastructure and research, together with improved crop production practices, has helped significantly increase food grains production.
Declining investments
However, the benefits of the Green Revolution are waning now. Public investment in agriculture is declining, and the annual increment to gross capital formation is now lower than in the early 1980s.
This trend is the same across all the States, not just the poorer ones. More interestingly, the 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 rose 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 is nowhere near enough to fill the gap caused by the decrease in public spending. Unfortunately, the agricultural loan waiver can hardly be used to create these investments.
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