A high level committee on ‘road-map for agriculture and rural sector in the next five years’ has recommended corrective steps to reduce agricultural subsidies and use the money thus saved [it has estimated the savings to be Rs 10,000 – 15,000 crore annually] for investment in rural areas for creating livelihood opportunities by empowering Farmers- Producer Organizations [FPOs], Joint Liability Groups [JLGs] and making small and marginal farmers diversified producers. It has also suggested providing FPOs and other forms of collectives a proper eco-system to grow and diversify operations.
The government spends close Rs 450,000 crore on agricultural and food subsidy every year. This includes food: Rs 175,000 crore; fertilizers: Rs 100,000 crore; PM-KISAN: Rs 90,000 crore; power [centre plus states]: Rs 50,000 crore; crop loan: Rs 18,000 crore; PMFBY [Pradhan Mantri Fasal Bima Yojna]: Rs 14,000 crore. The estimated savings from the measures suggested by the panel viz. giving credit on ‘evidence-based’ scale of finance, limiting food subsidy in urban areas [which at present is open ended], restricting fertilizer usage by linking to data base of land records and making the current DBT [direct benefit transfer] format for fertilizer subsidy more effective etc are peanuts 2-3%.
Even as subsidy continue to scale new highs producing hugely destabilizing impact on the budget of both the centre and states, little is being done by ruling dispensations to rein in these payments. All this when they have pledged [ritually] to bring these down and several high level committees came up with recommendations and even road-map to lower to specified level or even eliminate completely.
This has to do primarily with the inability to comprehend the nature of the problem in particular, the role of factors contributing to ballooning subsidies. Also, it has a lot to do with lack of political will on the part of successive governments to take even ‘baby steps’ [for instance, small hike in the price of agricultural inputs viz. fertilizer, power etc] to rein in subsidies leave aside major structural reforms needed to eliminate them completely. In this backdrop, the suggestion of above panel to prune subsidies and that too by a measly 2-3% does not instill confidence.
Let us take a look interest subsidy on which the panel has paid much attention. As per directives of Reserve Bank of India [RBI], farmers get short-term crop loans up to Rs 300,000/- at subsidized interest rate of 7% per annum [an additional incentive of 3% is provided for repayment within due date, implying an effective rate of only 4%]. The union government spends Rs 18,000 crore annually as reimbursement for this concession in interest rate. The irony is that this subsidy is not going where it should?
According to a study by an internal working group of the RBI, in several states, the quantum of crop loan is higher than the value of all agricultural inputs. In Andhra Pradesh [AP], during 2015-2017, this was found to be a whopping 7.5 times the value of agricultural inputs. Considering that crop loans are taken mostly for buying agricultural inputs and when the value of former exceeds the latter that too by a huge margin, it clearly points towards diversion of funds to other uses. It could even be that entities other than farmers were taking loans and availing of subsidy meant for agriculture.
Even out of credit that flows to agriculture, a disproportionately high share is cornered by large farmers viz. those owning land in excess of 10 hectares. During 2016-17, large farmers despite accounting for only 10% of the total number [about 140 million] got away with 41% of total agri-credit of Rs 900,000 crore. Small and marginal farmers [land holding size between 1 and 2 hectares and less than 1 hectare respectively] who account for nearly 86% of the total number don’t benefit from institutional credit. About 41% of them don’t even have access to commercial banks.
Asset creation in agriculture holds the key to increasing farmers’ income on a sustainable basis. Yet, share of investment credit in total farm credit has decreased from 50% during 2000 to barely 25% in 2016 thereby showing the lower priority assigned by lending institutions to this most critical aspect. A big chunk of even this limited credit is appropriated by medium and large farmers forcing small and marginal farmers to go for informal sources.
According to a committee on “Status of Farmers’ Income: Strategies for Accelerated Growth” to identify ways to double farmers’ income, landless and marginal farmers depend more on the informal sources for credit for asset creation as compared to the medium and large-size landholders. Thus, marginal farmers finance 52.1% of their investment through informal sources of borrowings such as moneylenders, traders and input dealers. The corresponding share for landless and small farmers is 40.6% and 30.8% respectively.
Rubbing salt on the injury, large farmers who manage loans from banks using their clout with officials and politicians, on-lend these to small and marginal farmers masquerading as money lenders. The differential interest is pocketed by them. Alternatively, they earn higher interest on fixed deposit in bank. Further, by repaying the loan in time, they get additional concession of 3% in interest [as per RBI rule] thereby boosting their profit from arbitrage.
In short, a big slice of credit meant for agriculture gets diverted. Whatever is available, most of it is taken by medium and large farmers. Small and marginal farmers who need the most don’t get. They are forced to depend on informal sources who charge high interest rates. This together with meager income [courtesy, low yield and low price] comes in the way of their paying back. This leads to debt pile up forcing many of them to the extreme step [read: suicide].
Being the biggest beneficiary of bank credit, large farmers also gain from farm loan waivers granted by almost every political dispensation winning elections in states [small and marginal farmers who have no access to bank hence, not availing loan, get excluded]. They also benefit disproportionately from other schemes such as PMFBY which are mostly administered through banks.
Even the PM – KISAN scheme [launched by the Prime Minister in December 2018, under it Rs 6000/- is given to every farmer annually in three installments of Rs 2000/- each] originally meant for small and marginal farmers was subsequently extended to cover all farmers. Thus, farmers having land in excess of 2 hectares including large farmers also get the benefit of the scheme.
There is also misuse of other subsidies which are meant mostly for small and marginal farmers. For instance, according to Economic Survey [2015-16], 24% of fertilizer subsidy is appropriated by inefficient manufacturers, 41% gets pilfered on way to the farmers and 24% cornered by large farmers. Only 11% of the benefit actually goes to small and marginal farmers. The steps taken by Modi – government such as neem coating of urea, issue of soil health cards [SHCs] etc have not helped much in curbing misuse.
As regards to food subsidy, beneficiaries of heavily subsidized food under the National Food Security Act [NFSA] include millions of non-poor. Besides, there are significant losses by way of pilferage from the public distribution system [PDS] – in some states as high as 50%. The inefficiencies of Food Corporation of India [FCI] and other state agencies [subsidized food is supplied through them] and inflated cost compound the subsidy burden. The story in regard to power subsidy is no different.
To conclude, the rot afflicting the administration of various subsidies is much deeper than what the panel has alluded to. No wonder, the steps suggested by it are peripheral and estimated savings from their implementation are a meager 2-3%.
The situation calls for major overhauling of subsidy regimes. In all major areas viz. credit, fertilizers, food, power etc, there is urgent need for structural reforms to focus on removal of controls and letting market forces guide pricing, production/supply, distribution and use and subsidy to the target beneficiaries [predominantly poor] given directly using the JAM [Jan Dhan – Aadhaar – Mobile] platform [merely putting cap on eligible persons or administrative improvements – suggested by the panel – won’t yield sustainable benefits]. Sans this, the loot of tax payers money will continue unabated even as millions of poor farmers will continue to remain trapped in abject poverty.