Creating domestic demand

FARM SECTOR IN BUDGET : How far some of Budget's initiatives will be beneficial to small farmers facing severe crisis, depends on the process of imple

Finance Minister Arun Jaitley presented the Union Budget amidst what he stated as high global uncertainty in terms of oil price increase, changing monetary policy stance and rise of protectionism policies of certain nations.

After the growth-dampening effects of demonetisation, creation of domestic demand by higher level of spending especially in rural sector in terms of increased allocation for rural job scheme, infrastructure development like rural housing and farmers’ welfare got emphasis in this Budget.

Containment of fiscal deficit at 3.2% is another major target which he aims to achieve partly through higher amount of direct taxes received through demonetisation. However, when we concentrate on the agriculture sector and farmers, how far some of his initiatives will be beneficial especially to the small and marginal farmers facing severe crisis today, depends critically on the process of implementation. A few major challenges in this regard are worth noting.

First of all, we know that agricultural sector in India in general and in Karnataka in particular is at a crossroads with different forces operating on it simultaneously. In the case of Karnataka, primarily, it is the predominance of the rain-fed agriculture that inhibits the growth, followed by vagaries of the weather. Consequent high instability in productivity is but a natural outcome of this situation which sets back the development clock in the agricultural sector. The state has a very low share of area under irrigation and therefore, protective irrigation does not play any significant role.

Due to the domination of the low-value low-density crops, the farmers’ income is continuously depressed, and given the periodic increase in prices of inputs (specifically of the cash inputs), farmers’ net income tends to shrink continuously, putting them under financial stress. Farm sector credit at reasonable terms and conditions is therefore of utmost importance. In the Budget, the target for agricultural credit in 2017-18 has been fixed at a record level of Rs 10 lakh crore.

Farm sector credit is at a subsidised interest rate of 7% with another 3% subvention for prompt repayment. However, today in the farm sector credit, there is widespread prevalence of gold loan. Banks prefer crop loan with gold as security as it helps them curb the problem of default. Farmers also prefer such loans as they are less cumbersome and quick. If we look at Karnataka, more than 70% of short-term crop loans come under gold loan. Needless to say, it is the farmers with gold who can avail such a loan.

Secondly, the landless tenant farmers who do not have land record to show, are left out of the net of formal credit. Thus, formal credit remains inaccessible for the poor and vulnerable farmers. To overcome such problems, a pre-specified percentage of crop loan (under priority sector lending) needs to be non-gold based and directed towards the marginal and landless farmers. Only then the enhanced credit limit will benefit the poor farmers.

A farmer even after making right investments, may not get due returns because of unforeseen reasons, most often beyond her/his control. In other words, farm income being uncertain, appropriate risk mitigation strategies are necessary for stabilising the income of the farmers.

There are mainly three types of risks emanating from as many sources of uncertainties. These are: production, price and input risks. While production risk may arise owing to two major factors – weather risk and risk from pests and diseases, price related risk occur due to sudden change of demand and instability in expectation formulation.

While all three types of risks appear to be present for farmers in India, production risks arising from uncertain weather is more significant as it often completely destroys the produce. Farmers unable to face such huge losses even commit suicide. One of the significant ways a farmer can hedge production risk, arising from tentative weather condition is through crop insurance.

Crop insurance

The Pradhan Mantri Fasal Bima Yojana (PMFBY) is a new crop insurance scheme designed to provide insurance coverage to the farmers. Under this scheme, the premium for farmers is brought down to 2% (earlier 2.5%) for kharif, and 1.5% for rabi. Commercial/horticulture crops which were earlier under actuarial premium rate, now have a cap of 5% premium rate. In addition, various categories are introduced in PMFBY for claims such as: prevented sowing, mid season adversity etc.

In this Budget, the minister has enhanced financial support to the crop insurance scheme to Rs 9,000 crore. He also stated that the coverage of this scheme will be increased from 30% of cropped area in 2016-17 to 40% in 2017-18 and 50% in 2018-19. While this is a welcome move, if we look at the percentage of farmers who adopted crop insurance in the country , it is found to be quite low and Karnataka which faces major weather related uncertainties (due to drought), the enrolment rate is found to be lower than the all India average.

For example, for kharif 2016, only 12.2% of farmers enrolled for PMFBY. One major reason for non-adoption is the lack of information about the scheme.

Thus, the poorest of the poor get excluded and it is the better off farmers who take the advantage. Secondly, even though the loanee farmers should get automatically insured, the insurance coverage figure shows otherwise. Thus, large percentage of loanee farmers remain excluded and one can imagine the status of the farmers who do not get access to formal sector loan.

Another major reason for non-adoption is that crop insurance is area-based and depends on cost of cultivation survey results. Thus, even if a farmer’s crop is destroyed, compensation would depend on whether the area in which the farmer is cultivating is considered as low yield area for that year or not based on the cost of cultivation survey.

‘Threshold level of yield’ which forms the basis for compensation, is a mystery to the farmers. Therefore, farmers feel that they may be paying insurance premiums unnecessarily and may not get compensated adequately for their losses.

(The writer is Professor, Institute for Social and Economic Change, Bengaluru)