Direct Benefit Transfer is not Direct Income Support

No sooner did Finance Minister Arun Jaitley say that “agriculture needs a lot of support for the Indian economy to grow at a steady pace” hinting at the possibility of a package of proposals to be announced for the distressed agriculture sector, a wave of industry sponsored voices across the country, including the credit rating agencies as well as the investment portfolio economists, have begun to question the need for such ‘populist decisions’.

“The aggregate fiscal deficit will come in higher at 3.2 per cent in financial year 2020, which is higher than the financial year 2019 mid-year outlook forecast of 2.8 per cent,” India Rating warns. “A fresh round of economic crisis is in the making”, screams another headline. For almost a month now, ever since the State governments in the Hindi heartland of Madhya Pradesh, Chhattisgarh and Rajasthan announced farm loan waivers, bankers and economists have been crying foul. Some are even questioning the fiscal prudence of providing direct income support along the lines of the Rythu Bandhu scheme in Telengana that provides financial assistance to small and marginal farmers.

Before we try to analyse the question of fiscal imbalances, let’s first look at what measures are likely to be announced in the forthcoming interim budget. Quoting sources several newspapers had earlier reported that the farm package would include interest-free loans without collateral and a direct income support package of Rs 10,000 per acre per year. Among the numerous suggestions was a proposal from the State Bank of India for a financial support of Rs 12,000 per family per year in two instalments, to be split for each of the cropping season. Niti Aayog had its own estimates.

Meanwhile, constrained by the outgo on tax revenue foregone, latest reports saying that the government has hardly any fiscal space left for the proposed additional spending on agriculture. The easy option being contemplated by Niti Aayog therefore is to combine all farm subsidies, including subsidies on fertilizer, crop insurance, irrigation and interest subvention, and transfer it in cash to farmers. Since the Finance Minister had already budgeted Rs 70,100-crore for farm subsidies for the fiscal year 2018-19, ending on March 31, the cash transfer of subsidies will not entail any additional budgetary expenditure.

While news agencies say that the rupee and bonds rebounded after the report pegged the cost lower than the over Rs. 2-lakh crore estimated initially, it is certainly not a farm package that is expected to enthuse farmers. Already reeling under terrible distress, with real farm incomes declining for four decades now, agriculture is in urgent need of immediate relief as well as a series of strong measures for course correction leading to an increase in farm incomes. But if direct benefit transfer (DBT) is all that the government has up its sleeves, there seems to be no respite in offing for the beleaguered farming community.

Direct benefit transfer is basically a change in mechanism to deliver subsidies. Launched on Jan 1, 2013, the focus of direct cash transfer is to bring in transparency and reduce pilferage in subsidy distribution. Therefore DBT can by no means be considered as a direct income support measure. DBT only replaces the input subsidies that the farmers are getting for crop cultivation. The cash that the farmers get eventually will be used for paying for inputs like fertiliser, pesticides, irrigation etc. In other words, the cash payment is merely a replacement of the subsidy component.   

There is a clear cut difference between DBT and direct income support that the policy planners must understand. Niti Aayog however is giving an illusion of income support when in reality it actually ends up computing the total subsidy outgo and presents it deceptively as an income support of roughly Rs 15,000 per hectare. It is worrying to see many mainline economists too propagating the same line, which in real sense means that there is a visible reluctance to really help the farming sector in distress, and to initiate steps to bail it out in the long run. DBT is being wrongly projected as a continuation of Telengana model of direct income support, which has now been adapted in divergent forms by Odisha, West Bengal, Jharkhand and Karnataka.

Although agriculture needs a holistic approach to draw it out from the terrible crisis that it has sunk into over the decades, my suggestions to the government would be to initiate the following:  

1) After the farm loan waiver, which benefits roughly 30 to 40 per cent of the farming population, the remaining should be provided with a one-time direct income support of at least Rs 50,000 per family. These are the people who had timely repaid the crop loans and are also in need of immediate relief. This will also ensure that credit line in future is not squeezed. As to where the money will come from, it will come from the same kitty from where economic stimulus package of Rs 1.86-lakh crore for India Inc which still continues since 2009, came from.       

2) Time has come for setting up a Farmers Income Commission with the mandate to ensure a monthly income of Rs 18,000 to every farming family. The Commission for Agricultural Costs and Prices (CACP) should be renamed as a Commission for Farmers Income and Welfare with the mandate to ensure a minimum monthly living income package of Rs 18,000, which should incorporate the income accruing from MSP, FPO and other market interventions. Take the average farm income in every district, and whatever is the shortfall should be paid by income transfer directly in Jan Dhan accounts of farmers.

3) Time to revisit the FRBM Act which provides for a limited outlay for agriculture and rural sectors. For instance, according to CBGA only 6.7 percent of the Madhya Pradesh budget in 2017-18 went for agriculture and allied activities whereas 85% of the population is directly or indirectly engaged in agriculture. Similarly, the macro-economic policies the Reserve Bank of India lays out too are responsible for keeping farming impoverished. By mandating the inflation target at 4 per cent, it actually deprives farmers of the rightful income.

4) Expand the existing network of regulated markets. Against the requirement of 42,000 APMC mandis in 5-km radius, only about 7,600 mandis exist at present. Also, make it obligatory for trade in eNAM markets to purchase at the MSP that is announced for 23 crops. The modal price that eNAMs provide, which is based on the average of the day's price, is nothing but a distress price actually aimed at helping in commodity trading. It is time to learn from the failure of eChaupal that too had the same objectives of eNAM. #

Direct benefit transfer no cure-all for farm crisis. The Tribune. Jan 25, 2019.
https://www.tribuneindia.com/news/comment/direct-benefit-transfer-no-cure-all-for-farm-crisis/718855.html?fbclid=IwAR29TlgzW196zfysvl9IG9r2cxjFXUvdXAV7K9jKOI_MgV5Wi6xDemPJWZQ

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For farmers, the question being asked is where will the money come from

Courtesy: Rediffmail 

Newly elected to US Congress from New York, the young and articulate Alexandria Ocasio-Cortez, is a strong advocate for social justice. She has been questioning the dominant economic policies challenging corporate tax cuts and demanding more budgetary allocations for health, education and housing. In a recent TV interview, where she outlined her thinking of what good economics should mean for the people, journalist Anderson Cooper asked: “How are you going to pay for all of this?”

Now, shift the focus to India. In the past few years, nearly Rs 2.3-lakh crore of farm loan waivers have been announced by Karnataka, Madhya Pradesh, Maharashtra, Andhra Pradesh, Rajasthan, Telangana, Punjab, Rajasthan, Chhattisgarh and Tamil Nadu. While the possibility of many more State governments announcing such waivers before the 2019 elections is scaring bankers, the new RBI governor Shaktiman Das has struck a note of caution on farm loan waivers, saying it will lead to credit indiscipline. Merrill Lynch, the investment banking arm of Bank of America, had earlier warned that the farm loan waivers will amount to 2 per cent of the GDP.

The question that I am being repeatedly asked is where will the money come from. On a TV show the other day, the anchor was very clear when she asked: “Given that the fiscal position is very tight across the States, aren’t you worried that the farm loan waiver spree will upset all calculations? Haven’t the farm loan waivers already set a bad precedent as a result of which other welfare schemes will be scaled back?”

The issue we were discussing was the Rs 36,359- crore loan waiver that the Uttar Pradesh government had implemented. In my answer I said that even with its limitation of not reaching out to every indebted farmer, the UP loan waiver had benefitted 4.4 million farmers. This is not a small number, and the beneficiaries outnumber the population of Ireland. Compare this with the Rs 72,000-crore loan waiver that was accorded to a handful of power distribution companies between 2012 and 2014 and surprisingly no questions were asked about credit indiscipline then nor did anyone talk of UP not having the capacity to fund power discom loan waivers and resort the higher market borrowings.  

On another business channel, I was told the farm loan waivers are a deadly poison. It’s a wrong way of addressing a real issue, and leads of moral hazard. In my reply I quoted an RBI document, which states that in the four year period between April 2014 and April 2018, Rs 3.16-lakh crore of corporate bad debt has been written-off. According to another statement in Parliament, as on Sept 30, 2018, besides the public sector undertakings, there were only 528 borrowers who had non-performing assets (NPAs) of Rs 6.28-lakh crore while only 95 of them had defaults exceeding Rs 1,000-crore. While the Rs 2.3 lakh-crore farm loan waiver, when fully implemented, will benefit an estimated 3.4 crore farming families, there is no qualm over a massive corporate write-off which provides a bailout to only a few companies.  

The immediate response to my counter-question made a panellist to immediately retort by saying ‘two wrongs don’t make it right’. Well, in that case do you mean to say that one wrong – which is the corporate loan write-off – is right? How can any sensible economist justify the massive corporate write-off and turn his ire towards the poor farmers, I asked. In fact, the bad corporate loans are piling up. The gross Non Performing Assets (NPAs), which is a sophisticated terminology to cover up the bank defaults, have further increased by a whopping 11.2 per cent reaching Rs 10.39-lakh crore in 2017-18, and only Rs 40,400-crores have been recovered through the much talked about Insolvency and Bankruptcy Code (IBC) and Sarfaesi Act. At no stage have I seen any TV programme that calls for putting an end to rising NPAs but a number of shows have focused on waiving the waivers, calling for immediately stopping the farm loan waivers.

 

While no questions are being asked about the ‘economic viability’ of the massive write-offs of a handful of corporate waivers, a lot of heat is being unnecessarily generated over farm loans depicting a clear-cut bias in economic thinking. Surprisingly, whenever I raise the question of Rs 18.60-lakh crore going to the industry in the past 10 years as an economic stimulus package, a deafening silence follows. What is little known is that it was in 2008-09 that the government started a stimulus package of Rs 1.86-lakh crore to the industry at the time of global economic meltdown in 2008-09, a package that still continues and has been paid for ten successive years. In simple terms, the industry is getting a direct income support every year and one has ever questioned whether the stimulus package has created any fiscal indiscipline. No one ever asked where the money did come from for the Rs 18.60-lakh crore financial stimuli.

Take the case of 7th Pay Commission. Finance Minister Arun Jaitley has said in Parliament that the addition financial burden will be Rs 1.02-lakh crore every year. This will benefit 45 lakh central government employees and 50 lakh pensioners. When implemented across the country, with State governments, Public Sector Undertaking (PSUs) and colleges and universities fulfilling its obligations, the total annual burden will swell to Rs 4.5 to Rs 4.8 lakh crore, says a Credit Suisse bank study. No questions were ever asked where the money will come from and not did anyone question the widening fiscal deficit as a consequence. But talk of a farm loan waiver or any direct income support initiatives for farmers, the media gets hyper active in questioning the fiscal arithmetic.

In the US, as Alexandria explained, “Money will come from the same source from where the money for massive corporate tax exemptions come; from where the money for defence budgets come; and from where the money for space programme comes.” In India too, the money will come from the same kitty from where the budgetary allocations for 7^thPay Commission comes; from where the money for corporate tax exemptions come; and from where the money for massive bank write-offs for NPAs come. #

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There are fundamental problems in the design of the crop insurance scheme

A well designed crop insurance scheme is the best safety net 

Pradhan Mantri Fasal Bima Yojna (PMFBY), the flagship programme launched with much fanfare in 2016 has run into rough weather. With both the area covered and the number of enrolled farmers declining, the country’s premium crop insurance scheme is certainly in need of an overhaul.

While the Parliament’s Committee on Estimates, chaired by the senior BJP leader Murli Manohar Joshi, has in its latest report called for re-formulation of the agricultural insurance scheme, seeking transparency in its working and asking for more financial allocations to attract increasing participation from farmers, there are fundamental flaws in the design of the scheme that renders it rather ineffective.

At a time when farm gate prices had remained subdued over the past few years, and when fluctuating climatic conditions – drought, floods, as well as freak weather patterns including hailstorm, strong winds etc. had flattened the standing crop at many a places, PMFBY could have come as the much needed safety net. But a badly designed crop insurance programme has failed to come to rescue of the beleaguered farming community. Take the case of Haryana, where standing crops in 1.85 lakh acres in 15 districts were damaged in September by heavy rains and resulting floods. Interestingly, while the revenue estimates of the crop damage are ready, the crop losses suffered do not tally with the crops that were insured by the private crop insurance companies. This is because the insurance companies just collected the premium amounts from the banks without actually doing a ground assessment to know what crops were under cultivation.

The government perhaps did not visualize that there were serious problems in the way the scheme was designed. The methodology itself was faulty. No wonder, some estimates show the enrollment under PMFBY has declined by 17 per cent, from 40.2 million in 2016 to 33.2 million by 2018. Instead of rectifying the forcible enrolment, as a result of which the premium amount is automatically deducted from the bank accounts of loanee farmers, the banks have now been asked to provide the premium amount (in case of irregular accounts) by giving an overdraft for which the farmers will also have to pay interest. The basic objective being to show an increase in the number of farmers enrolled. Forcible addition of number of farmers under the scheme should not be seen as a measure of its success.  

Once the premiums are collected, a threshold limit is ascribed for the maximum claim in the event of a crop loss. In other words, if the threshold limit is low, the claim a farmer makes would get him a fraction of the loss he incurs. To illustrate, let’s look at an example from Bundli district in Rajasthan. A study conducted by Centre for Science and Environment (CSE) had shown that for soybean crop farmers were insured for a maximum of Rs 16,539 per hectare against a maximum output value of Rs 50,000. Similarly for paddy, the maximum a farmer could be compensated for was Rs 17,096 whereas the output value stood at Rs 65,000. This is also linked to the process of auction that is adopted while estimating the losses to be insured. Companies first give their preference of the regions where they want to operate, and then an open bidding is held. As a result of selective bidding the gross premium swells. Such a flawed system of estimating premium amounts does not operate anywhere in the world. This defeats the basic purpose of bringing in 12 private companies for crop insurance. Instead of building competition among the private players, the design allows for monopolization and formation of cartels. 

I have never understood the rationale of treating village or village panchayat as a unit of insurance. Why can’t the compensation be paid treating the farm as a unit? Of course, the insurance companies would not like to undertake this arduous exercise but at time when remote sensing and drone technology is available, there is no reason why the insurance companies should not be directed to treat an individual farm as the base for insurance claims. Further, since 24 crop-cutting experiments are mandated for each district, four for major crops and eight for other crops, a total of 40-lakh crop cutting experiments are required to be held every year. This could have been a huge employment generation opportunity if the government had insisted that the companies create its own workforce rather than allowing outsourcing of its agricultural officials for the purpose. But then, who wouldn’t like making profits without making adequate investments. 


Fundamental flaws in crop insurance scheme's design makes it ineffective. LiveMint. Jan 9, 2019
https://www.livemint.com/Politics/vPD0hLee4cWmmoEVvQteRJ/Fundamental-flaws-in-crop-insurance-schemes-design-renders.html?fbclid=IwAR2ZYX80-STaq1tl5IvhtI6uCiC9Vo1P_8O4KjZUuI_7AFVwvPqa2zIJDYE

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Let 2019 be an Year of Agricultural Reforms

For four years in a row, Pradeep Sharma, a potato grower from Agra district in UttarPradesh has been suffering losses. Cultivating potatoes in 10 acres this year, he brought 19,000 kg to the mandi only to get a profit of Rs 490 after selling his entire produce. In anger, he sent his paltry earnings to the Prime Minister saying perhaps he will come to understand my problems. A few days earlier, a Madhya Pradesh farmer, Bherulal Malviya, had died of shock after selling his 27,000 kg of onions for just Rs 10,000 in Mandsaur market.

Such distressing media reports depicting the misery of the farming community have donned the media headlines for quite some time now. With losses mounting over the years, farmers have been literally surviving on loans, taking credit from both formal and informal sources. As of Sept 2016, Rs 12.60-lakh crores was the outstanding agricultural loan. Compare this with the average income of Rs 20,000 per year in 17 states, roughly half the country, the desolation is clear. 

Picture the terrible agrarian distress that prevails in the ongoing debate over whether farm loan waiver is the right answers to address farmer’s woes, and secondly, how will the state governments bear the fiscal burden? The speed at which the newly elected Chief Minister’s of Madhya Pradesh, Rajasthan and Chhattisgarh have announced farm loan waivers soon after assuming office, questions are being asked over the ‘economic viability’ of an otherwise ‘politically sound’ measure, the bigger question being tossed around is where will the money come from?  

It doesn’t end here. After Telangana launched the trend-setting Rythu Bandhu programme providing a fixed amount of Rs 8,000 per acre (now raised to Rs 10,000) per year as direct income support to farmers, it has triggered a chain reaction among States to announce similar or improved versions of financial aid. First, the erstwhile Congress government in Karnataka came up with similar package to provide Rs 5,000 per hectare to dryland farmers, and after the recent electoral debacle in the Hindi heartland, and fearing the Congress and BJP’s promise to waive farm loans if voted to power, and obviously in an effort to woo farmers ahead of the forthcoming Assembly elections, Odisha declared an economic package. Instead of a loan waiver, Odisha announced Rs 10,180-crore package for three years under the Krushak Assistance for Livelihood and Income Augmentation (KALIA) programme for land owning farmers, tenant farmers as well as landless labourers and sharecroppers. This will benefit 57-lakh households.

Jharkhand was quick to follow it up with Rs 2,250-crore schemes to help 22.76 lakh small and marginal farmers with a financial support of Rs 5,000 per acre per year, with an upper limit of 5 acres. And while Haryana is contemplating a pension scheme for farmers, West Bengal was quick to come up with Krishak Bandhu Scheme under which each farmer will get cash support of Rs 10,000 per acre per year. In addition, it will provide a life insurance cover of Rs 2 lakh per farmer, irrespective of the cause, for farmers between the age of 18 and 60. The premium will also be paid by the state government.

Let’s first look at the loan waivers. After Chhattisgarh announced the farm loan waiver, Rs 1,248-crore has already been transferred to bank accounts of 3.5 lakh farmers in the first phase, waiving a maximum of Rs 2-lakh each. In Punjab, despite the slow progress, a total of 4.14 lakh small and marginal farmers who had defaulted on cooperative and commercial banks have got a loan waiver of approximately Rs 3,500-crore. For the country as a whole, a total of Rs 2.3-lakh crore of farm loans announced by Karnataka, Madhya Pradesh, Maharashtra, Andhra Pradesh, Rajasthan, Telangana, Punjab, Rajasthan, Chhattisgarh and Tamil Nadu will benefit and estimated 3.4-crore farm families.

Compare this with corporate loan write-offs. This will tell us where the money is getting siphoned-off. According to the Reserve Bank of India, in the four year period between April 2014 and April 2018, Rs 3.16-lakh crore has been written-off while only Rs 32,693-crore of the outstanding amount has been recovered. Accordingly, as on Sept 30, 2018, besides the public sector undertakings, there were only 528 borrowers who had non-performing assets (NPAs) of Rs 6.28-lakh crore while only 95 of them had defaults exceeding Rs 1,000-crore. While no questions are being asked about the ‘economic viability’ of the massive write-offs of a handful of corporate waivers, a lot of heat is being unnecessarily generated over farm loans depicting a clear-cut bias in economic thinking.

Meanwhile, gross NPAs have further increased by a whopping 11.2 per cent reaching Rs 10.39-lakh crore in 2017-18, and only Rs 40,400-crores have been recovered through the much touted Insolvency and Bankruptcy Code (IBC) and Sarfaesi Act. The surge in NPAs is happening despite providing an economic stimulus of Rs 18.60-lakh crore to the industry in the past 10 years. It was in 2008-09 that the government started a stimulus package of Rs 1.86-lakh crore to the industry at the time of global economic meltdown in 2008-09, a package that still continues. In simple terms, the industry is getting a direct income support every year.  

Although considered to be ‘less distorting’ than farm loan waivers, reports indicate that the Centre is looking at the possibility of providing a direct income support of Rs 4,000 to farmers. Estimates point that the proposed direct support will cost the exchequer Rs 2-lakh crore. While this amount may appear big, the fact of the matter is that Rs 4,000 a year comes to less than Rs 340 a month, almost equal to the price of two cups of coffee/tea at any trendy coffee shop. If Rs 340 per month is considered to be an appropriate financial sop for the beleaguered farming community, it only shows the extent of deprivation and income inequality that prevails.  

While farm loan waivers are an economic necessity, and the state governments will have to find adequate resources, direct income support should not be seen as a permanent solution to the agrarian crisis. Agriculture needs a set of robust reforms in addition to the immediate sops being considered. Let 2019 be the year of agricultural reforms, and if the government can provide 7,000 steps, both small and big, for ease of doing business I see no reason why a similar amount of initiatives cannot be considered for ease of doing agriculture. After all, it involves 52 per cent of the country’s population. There lies the perfect economic prescription for Sabka saath, Sabka Vikas.

Let it be year of farm reforms. The Tribune. Jan 4, 2019
https://www.tribuneindia.com/news/comment/let-it-be-year-of-farm-reforms/708313.html

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