Why Farmers Still Don’t Trust the Government

Chintan Patel and Vivek Kaul

In a recent column, the veteran editor Shekhar Gupta wrote that Indian politics is now clearly divided along economic lines, with the BJP + being ‘unabashed backers of private sector’ and others in the opposition being ‘freshly dyed-in-red socialists’.

While definitive statements on politics of the day are rarely totally correct, they can always be placed in a certain context. Let’s take the case of farm laws pushed very hard by the current union government and passed by the Parliament.

While there is no denying that economic reforms in agriculture are the order of the day, there is also no denying that the way these laws have been drafted and pushed through the Parliament, it makes the union government look like unabashed backers of the private sector, which in a democracy isn’t possibly a good thing.

In the same column, Gupta quoted the former finance and home minister, P Chidambaram’s view on the union budget, presented at the beginning of this month. Chidambaram, as Gupta quoted him, said: “It was a Budget… addressed to the one per cent of Indians who owned 73 per cent of national wealth.”

Of course, Chidambaram’s party, the Congress, which largely governed India up to 1996, with a few brief interludes in between, and then again from 2004 to 2014, has been responsible for a lot of this inequality.

If we were to take a leaf out of Gupta’s book and make a definitive statement, what the Congress practiced for many years was bad socialism and what the BJP is currently practicing in case of the new farm laws, and as we shall see in this piece, is bad capitalism.

But before we get around to doing that we need to go back in history a little.

The State of the Indian Farmer

Up until the mid 1960s, India was dependent on wheat imports, primarily from the United States. In order to set this right, the union government of the day promoted the green revolution. To encourage the farmers to grow a certain kind of wheat, the government provided price support, in the wheat-growing areas of Punjab and Haryana by buying wheat through the Food Corporation of India (FCI).

This essentially convinced the farmers to grow the specific kind of wheat that the government wanted it to, given that there was a ready buyer for it. This procurement of foodgrains initially started with the noble motive of helping the farmers who were taking part in the initial phase of the Green Revolution

Gradually, the FCI started procuring rice as well and thereby encouraged farmers to grow rice in the semi-arid region of Punjab as well as Haryana. In that sense, policies formulated to usher in the green revolution in the 1960s have long become outdated. They promote wrong cropping patterns that are neither environmentally optimal nor responsive to demands of the population. This has also led to depletion of ground water in large parts of Punjab and Haryana.

Thanks to the green revolution and the procurement infrastructure that developed because of it, India now overproduces foodgrains and does not produce enough of other food items, for which there is demand.

As of February 2021, the FCI had a total stock of rice and wheat amounting to 561.93 lakh tonnes. While the total stock that needs to be maintained as of January 1 every year, including the operational stock and the strategic reserve, amounts to 214.1 lakh tonnes.

Clearly, there is a problem of over production and over storage here. It also means that the government ends up over buying rice and wheat, which it doesn’t really need and which then sits in the godowns of FCI and rots.

On the other hand, India isn’t growing enough of something like pulses. While the per capita production has improved in the recent years, it is still not anywhere near where it used to be in the mid 1960s. In 2019-20, the per capita production of pulses stood at 16.9 kg, up from 13.6 kg in 2014-15, but still nowhere near a production of 25 kg per capita in 1964-65.[i]

The over production of rice and wheat doesn’t just lead to underproduction of other agricultural crops, it creates other problems as well. (In order to get a good overview of the other problems, please click here to read a piece one of us wrote in September 2020, when the farmer protests were just about starting).

We wouldn’t be over-stretching if we say that there is a huge problem in the way agriculture is currently practiced in this country. And if Indians, and not just India, has to progress, the Indian agriculture system needs to be set right. The farming laws in their current state are not going to achieve that.

In 2020, farmers formed around 41.5% of India’s workforce but contributed only  around 15-16% of India’s economic output. This basically means that farmer incomes are abysmal. The average household income of farmers was Rs 6,427 a month as per the Situation Assessment Survey of Agricultural Household 2013 – with farmers in some states making much lesser than the average. To give a sense of the state-wise skew on this figure, the income for Punjab was Rs 18,509, for Haryana it was Rs 14,434 (the top two) and that for Bihar it was just Rs 3,557. An average household in India has five members.

This data is on the slightly older side. One thing we can do is to adjust it for inflation between December 2013 and December 2020. The rural inflation as measured by the consumer price index between these two time periods stood at 4.4% per year. Assuming that the farmer incomes have grown at this rate per year, then the average household income of farmers stands at Rs 8,688 per month.

Of course, and as we have seen above, there are variations around the average income across the states, but even with that, the farming income is low. In this backdrop, it is clear that the status quo in Indian agriculture is untenable. Policy-makers face a stiff task of inducing changes in cropping decisions whilst improving farmer incomes.

There is also the promise of doubling farmer incomes by 2022, which was first made Prime Minister  Narendra Modi at a rally in Bareilly on February 28, 2016 and reiterated by Arun Jaitley in the budget speech next day.

The New Farm Laws

On September 27, 2020, President Ram Nath Kovind approved three Farm Bills (which were passed in the Lok Sabha on September 17 and in the Rajya Sabha on September 20). These laws are seemingly an attempt to achieve the twin objectives of raising farmer incomes and modifying cropping pattern. These laws are as follows:

1) The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act 2020 (which the farmers refer to as the APMC Bypass Act ) creates a mechanism allowing the farmers to sell their farm produces outside the Agriculture Produce Market Committees (APMCs). Any license-holder trader can buy the produce from the farmers at mutually agreed prices.

2) The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Act 2020 (referred to as Farmers Contract Act hereafter) seeks to create a legal framework for contract farming in India, wherein farmers can enter into a direct agreement with a buyer to sell the produce at predetermined prices through verbal or written contracts.

3) The Essential Commodities (Amendment) Act 2020 is an amendment to the existing Essential Commodities Act, deregulating storage limits on items such as cereals, pulses, oilseeds, edible oils, onions and potatoes, except in extraordinary situations.

Farmer groups across the nation have opposed the new laws and brought their protest to the streets, and the ensuing stand-off with the union government has gone on for several months now. While protests against the farm laws have happened all across the country, the main sustained protest has happened on the borders of Delhi, leading many commentators to say that this is primarily a protest of large farmers of North India.

There is no denying that large farmers have the most to lose and are maybe driving this movement, nevertheless, at the same time it needs to be said that large protests typically tend to happen around the seat of power.

As veteran editor and economy watcher TN Ninan wrote in a recent column: “ Much of the action in the French Revolution was centred on Paris.” The same thing happened when the Bolsheviks led by Vladmir Lenin took over the strategic locations in the Russian capital of Petrograd (now known as Saint Petersburg). Hence, Delhi will remain symbolic in the same sense.

In this piece, we look at the different arguments put forth by those who are opposing these laws and try to figure out how much sense they make. We also look at the overall issue of agricultural reforms. Let’s take a look at these pointwise.

1) A chief concern of farmer groups opposing these laws is that the new laws herald a change in policy which will lead to a roll-back on government procurement of foodgrains and minimum support prices (MSPs). The government declares MSPs for 23 crops every year, but it primarily buys rice and wheat directly from farmers at the MSP. In the recent past, it has also bought pulses and oilseeds to promote their production.

Apprehensions regarding the dismantling of the MSP regime explain the mass mobilization of farmers in Punjab, Haryana and western UP – areas with high government procurement of grains, due to historical reasons of the union government wanting to promote the green revolution in the country.

While the new legislation itself is silent on the MSP, the government has repeatedly given assurances that procurement and MSPs will continue. But these assurances in isolation haven’t been enough to placate farmer fears. There are multiple reasons for the same.

As NITI Aayog’s occasional paper titled Raising Agricultural Productivity and Making Farming Remunerative for Farmers published in December 2015, points out: “There is a need for reorientation of price policy if it is to serve the basic goal of remunerative prices for farmers. This goal cannot be achieved through procurement backed MSP since it is neither feasible nor desirable for the government to buy each commodity in each market in all region.”

This paper essentially had the philosophical underpinnings on which the new farm laws are based.

Also, if the government purchases and the MSP are done away with, there will be further danger of free power, fertiliser subsidy etc., being done away with as well. This is something that farmers who benefit from these things, wouldn’t want.

Secondly, if the idea is to promote private corporate trade in agriculture over a a period of time, then it is but natural for the government to gradually get out of the sector. That is how liberalisation of any sector has worked over the years. Hence, the government’s assurance on MSP and procurement haven’t carried much weight with the farmers.

On the flip side, the rice and wheat which the FCI buys directly from the farmers, it distributes through the public distribution system or ration shops as they are more popularly known, at a very low price to meet the needs of food security.

Given that the public distribution system is in place, it will be very difficult for the government to totally get out of the system of declaring MSPs and procuring rice and wheat. Also, the importance of this system has come into focus in the past one year, as the government distributed free rice and wheat through these shops across the country, to negate the negative economic impact of the spread of the covid-pandemic.

Hence, it is highly unlikely that the government will do away with MSPs and procurement, though the level of procurement might come down over the years, with the government only buying as much as it needs to fulfil the needs of food security and not more.

Net net, the system as it exists is likely to change in the years to come. Further, given the way the government pushed the farm laws through the Parliament, it has become difficult for the farmers to trust the government.

2) Other than the MSP issue, there are several other reasons which have farmer groups alarmed.

Central to a bulk of these concerns is the role of the Agricultural Produce Market Committees or APMCs. The new APMC-bypass law does not explicitly call for the closure of existing APMCs (or mandis as they are more popularly known as).  However, it allows private-party transactions between buyers and sellers outside the mandis. Transactions that take place outside the APMCs are not subject to either state cess or state APMC laws.

This effectively creates two parallel marketplaces – one that is highly regulated, and one that is very lightly regulated, if at all. One that is controlled by the state governments and another that is controlled by the union government.

Farmers contend that such an arrangement is effectively a death-knell for the mandis, as non-mandi transactions have been heavily incentivized. They argue that a regulated marketplace within the mandi will be replaced by an unregulated marketplace outside the APMC framework. Transactions conducted outside the APMCs would be no longer regulated in the same way, implying that government officials cannot step in to address irregularities around weighing and measurement of produce and payment disputes.

Now, sarkari interference in a commercial transaction or setting, is mostly viewed as a bureaucratic hurdle by all parties involved. Yet interestingly the prospect of getting rid of this oversight has the farmers concerned implying that their fear of being exploited by buyers and traders in an unregulated setting, outweighs whatever shortcomings there might be in the existing system.

On the flip side, the outside competition should help in driving down the high mandi fees, which exist currently.

Experts who have come out in support of these laws have pointed out that the removal of the APMC cess, removal of barriers of entry for new purchasers and increased competition for crop procurement, which these new laws are likely to bring in, will help drive crop prices higher. So, why then are farmers so resistant to the new unregulated marketplace?

One patronizing line of reasoning, as has been the case whenever reforms are pushed through stealth, is that the farmers are too naive to understand what is really in their best interests, presumably due their ignorance of economics and benefits of free-markets.

The link between reduced regulations and increased prosperity is well established in other sectors in post-liberalized India. That said, discounting the lived experience and opinion of the stakeholders and purported beneficiaries of a given law is unwise.

It is important to note that a large portion of farm trade already occurs outside of APMCs. The chart below shows the proportion of sales across various channels for a list of agricultural commodities. It can be seen that non-APMC transactions feature prominently for most agricultural items.

Source: NSS Report 70th round.
Chart: https://www.theindiaforum.in/article/three-farm-bills.

Let’s take the case of rice and wheat, the two foodgrains primarily bought by the government directly from the farmer. In case of rice (paddy) 63% of the total quantity was sold in local private markets. In case of wheat it was at 25%.

This happens for a host of reasons such as distance constraints, door-step sales to offset past debt, the difference in government procurement infrastructure across different parts of the country, etc.

The best metric of efficacy of any new policy will be its effect on farmer incomes, which are ultimately determined by prices farmers get for their produce. And this is where APMCs play an important role in the price discovery process. Prices for agricultural produce are decided in APMCs by open- auctions or closed-bid tenders.

Thus the APMCs serve as transmitters of pricing information across the market, as sales occurring outside the mandis are influenced by APMC prices as well. Once APMCs become obsolete, as is the fear, how will price discovery happen?  That is one concern raised by farm groups resisting the APMC-Bypass law.

In this sense, there needs to be some level playing field between APMCs and the new markets that are expected to spring up thanks to the new laws.

3) Another concern raised by critics is that the decline of APMCs will lead to fragmented markets and render farmers more vulnerable to exploitation by traders. The APMCs provide a platform for collective bargaining which is only possible with aggregated and coordinated sales. Once sales migrate to private, uncoordinated transactions there is a possibility of monopsonies emerging for each distributed geography pushing sale prices downward.

A monopsony is a market which has a single buyer, giving that sole player an undue advantage on dictating prices. As an example, if Maruti was the only car manufacturer in the country, it would enjoy a near monopsony over the automobile spare parts market. In such thin and fragmented markets, the balance of information and bargaining power will be heavily tilted against farmers, especially ones with small holdings.

While these fears are not unfounded, it should be pointed out that the existing system of price discovery and middlemen has been prone to manipulation by traders and commission agents, much to the detriment of farmers. As Sudha Narayan, a noted agricultural economist points out, even with open auctions, middlemen and traders often collude against farmers to depress sale prices.

Also, it needs to be said here that most of India’s farmers are too small to be dealing with any marketing system on their own. The point being that even in the new markets that are likely to emerge middlemen might continue to be the order of the day.

It is being assumed that buyers who currently buy from big commission agents, will start buying directly from farmers and let go of the middleman. There is a reason why these buyers buy from agents. It is convenient for them to do so. Do they want to take on the headache of building a new system right from scratch? Is it worth their time and money?

These are questions for which answers will become clearer in the days to come. But prima facie given the abysmal ease of doing business in most states, we see no reason why the buyers won’t continue buying from the agents, instead of having to deal with many farmers. This is a point that needs to be kept in mind as well.

For such small farmers to be able to benefit and get a better price for their produce without selling to a middleman, all kinds of other infrastructure is needed. These include everything from more cold storages to improved roads connecting villages to the newer markets that come up, power supply which can be relied upon (so that a cold storage can function like one) and traders who compete to get their produce.

It is worth remembering that arthiyas (commission agents) who buy produce from farmers at APMCs, are locally influential people. Hence, assuming that parallel systems of buying and selling in the form of new trade markets, will come up automatically, is rather lame.

It is worth remembering that many arthiyas are themselves big farmers and can ensure that the system continues to work as it is. They might just move out of APMCs to avoid paying levies (which are very high especially in states of Punjab and Haryana at 8.5% and 6.5%, respectively). Everything else might continue to be the same. This depends on whether creation of new infrastructure is worth not paying the levy.

4) The displacement of trade into the unregulated sphere has another downside. It invisiblizes data. When agriculture sales and storage are not recorded centrally, key data points get lost. Evidence-based policy making requires robust data. Without the availability of data on sale prices, volumes and storage, policy makers could be rendered “blind”, adversely affecting decisions regarding agriculture, food security, and food distribution.

One solution to this problem would be to mandate the recording of all trade outside APMCs be recorded in a central/state registry, especially if the new regulations lead to the creation of new markets with decent infrastructure (as opposed to fragmented, distributed transactions).

5)  Other than profitability, these laws have also been opposed on the grounds of being unduly favourable to corporates. This, as we said at the very beginning, makes the government, look like an unabashed backer of the corporate system.

Section 15 of the Farmers’ Produce Act says “no civil court shall have jurisdiction to entertain any suit or proceedings in respect of any matter, the cognisance of which can be taken and disposed of by any authority empowered by or under this Act or the rules made thereunder.”

Instead, the adjudicating powers are given to Sub-Divisional Magistrates (SDMs) and Additional District Magistrates (ADMs) – both being bureaucrats. This has stoked fears of subversion of justice against the farmer. If there is a small farmer on one side of the dispute and a large or even a medium sized corporate on the other side, whose side is the bureaucrat likely to take? One doesn’t need a degree in rocket science or an advance qualification in computer chip design, to answer this question.

This provision in the new farm laws, which doesn’t allow farmers to take a dispute to a Civil Court, also seems to be in line with the narrative of too much democracy inhibiting economic reforms, that has been promoted in the recent past.

So what is the net learning from all this?

The attitude towards corporates highlights the us-vs-them mentality of farmer leaders and activists. If something is good for big business, it must be bad for them. Their argument is that the “freedoms” offered by the new laws vis-a-vis crop sales or storage already existed for the farmers. The changes introduced by the new farm laws are to essentially unshackle the corporates.

This extreme suspicion of corporates and their profit-making motives is unfortunate and can be attributed to both the legacy of socialist thought in India, the politicians often bad-mouthing businessmen, the less than exemplary behaviour of corporates themselves and instances of exploitative practices by corporates in the past.

A blanket fear of corporate involvement is arguably short-sighted, even if understandable due to past practices. Having a robust supply chain of climate-controlled warehouses and transportation is critical to allowing farmers to tap into larger national and international markets.

One practical way to do this at a substantial scale is to attract investment by large corporates. Corporatization en-masse doesn’t have to mean exploitation of farmers. On the contrary, it can help realize higher incomes, given the correct safeguards and regulatory oversight, which has gone missing in the new laws.

This needs to be communicated as well as demonstrated with a few success stories if such materialize, where deregulation and entry of corporates leads to increased farmer incomes. Once farmers have seen concrete benefits maybe the psychology of distrust against corporate players can be reversed.

As Vijay Kelkar and Ajay Shah write in,  In Service of the Republic: “ The safe strategy in public policy is to incrementally evolve—making small moves, obtaining feedback from the empirical evidence, and refining policy work in response to evidence.” Of course, moving incrementally goes against the very idea of a government which believes in making big moves and building a huge narrative around it.

Trust is perhaps the core issue that fuels farmer opposition. There seems to be a complete breakdown of trust in the current government from the farmers’ end. The seeds of discontent were first sown by repeated inconsistencies between election manifestos and implemented policies.

Such tendencies are not unique to the current ruling party, but that hardly absolves them of some significant reversals on election promises. Issues that farmers find particularly grating are the inconsistencies in the Modi government’s stance towards implementing the Swaminathan commission recommendations and their reversal on the promise to open 22,000 agriculture mandis for improved market access.

Also, what does not help is the way these laws were pushed through the Parliament, without any discussion being initiated with the farmers. The government got talking with them only after the protests erupted. In this environment, it is hardly surprising that there is low trust.

The government did itself no favours by the manner in which it introduced the new laws. Even if the intent is to benefit farmers by bringing in the new laws, the means employed by the government do not inspire confidence. Constitutional norms of deliberation and debate in the Parliament were circumvented to make sudden, sweeping changes on a state subject, reneging on our federal ethos.

Moreover, the laws were drafted unilaterally, without seeking inputs from farmers – the purported beneficiaries. Circumventing these good-faith practices has furthered suspicions held by detractors that the laws are indeed meant to further corporate interests only. What hasn’t helped is the fact that farmers cannot challenge disputes arising under these news laws, in Civil Courts.

As the American experience of the late 19th century and early 20th century shows, unregulated capitalism only leads to robber barons and huge inequality in the society, which India has enough of already. Hence, bad socialism has now been replaced by bad capitalism.

Farmer protests continue to expose the deep fault lines in our agrarian economy. The response to these laws offer some valuable lessons to politicians and policymakers. For one, it is impossible to predict with certainty the effect of these laws on agriculture prices. The arguments put forth by farmers merit meaningful engagement.

Dismissing their concerns as misguided or malicious smacks of hubris. In a democracy, good leadership and policymaking is as much about means as ends. Transparency, debate and discussions are essential before draft bills become laws. It is essential to engage key stakeholders and socialize any big-bang changes to avoid surprises and minimize disruptions. One can only hope that the political class has the wisdom and grace to recognize their mistakes and learn from them.

But all this involves hard work, which is a tad too much for a government primarily engaged in building narratives and following them up purposefully. Also, by trying to push agricultural reforms through the stealth route and not engaging with the status quo, the government has done the cause of economic reforms a great harm. In the time to come, it will become even more difficult for it to push through any new economic reform, unless it sits and talks this one out with the farmers.

For starters it should offer to do away with some of the most controversial clauses in the new laws which favour the corporates at the cost of the farmers. That can at least be a small start.

[i] https://niti.gov.in/sites/default/files/2019-07/RAP3.pdf and author calculations on data from http://agricoop.nic.in/sites/default/files/FirstEstimate2020-21.pdf. Population of India in 2019 assumed to be 137 crore, using World Bank data.

Raghuram Rajan’s 10 Solutions to Get Economy Going Again


Summary: This one is for all of you, where are the solutions wallahs. Of course, I have offered many of the solutions that Rajan has offered in a column, but never put them together in one place.

One of the perils of writing on the Indian economy in the last six years has been the repeated comment from a few, don’t tell us about the problems, but give us the solutions. I mean how do you discuss solutions without highlighting problems. How do you come up with a prognosis without coming up with a diagnosis in the first place?

It’s not that one hasn’t highlighted solutions in what one has written over the years, but it’s just that where are the solutions wallahs, don’t seem to notice them. This belief that economics has solutions to everything (particularly among the non-economists, which means most of us), is very strong.

Over the years, I have come to believe that this is primarily because almost all of us are brought up writing exams where every question has an answer and every problem (in the mathematical sense of the term) has a solution. Life and economics don’t work like that. If everything had a solution, the word problem wouldn’t exist in the first place.

Nevertheless, this piece is all about solutions; things that the central government can do right now (and should have been doing by now) to get the economy going again. I have just finished reading Dr Raghuram Rajan’s piece on the Indian GDP (Gross Domestic Product) collapse. GDP is a measure of the economic size of a country.

Dr Rajan, who was the governor of the Reserve Bank of India (RBI), has offered many solutions. These are things that the government can do to get the economy going again. I have offered many of these solutions in my writing as well, though never gotten around to writing about all the solutions together at one place.

Let’s take a look at these solutions, one by one.

1) The government needs to expand its resource envelope in every way possible, Rajan writes. At the cost sounding like a broken record, it needs to sell its stakes in many public sector enterprises (how many times have I said this). In fact, in a sense it has already missed out on the current buoyant state of the stock market. The total amount of money collected through the disinvestment route during this financial year, remains close to zero.

Rajan also suggests that the government should be ready for on tap sale of its stakes in public sector enterprises, to take advantage of every period of market buoyancy.

2) Many public sector enterprises own land, in prime areas of India’s cities. And this land needs to be sold (Again, how many times have I suggested this). In fact, in a city like Ranchi, where I come from, the Heavy Engineering Corporation (a public sector enterprise) sits on acres and acres of government land. All this land across all these companies needs to be sold and money be raised. Of course, this isn’t going to happen overnight.

But that’s not the point here. If the government shows serious intent on this front by announcing a time-table to do this, as well as making preparations for the sale, this is something that the bond market will notice and be happy about.

3) Why is it important to keep the bond market happy? With tax collections collapsing by 30%, between April and July 2020 in comparison to the same period in 2019, it is but natural that the government will end up borrowing more. This is likely to push up the return (or the yield) that the market demands on the government borrowings, given that there is only so much financial savings going around. Other factors that will give confidence to the bond market is the publishing of the correct fiscal deficit numbers unlike the massaged numbers that are currently declared (well, well, well, I have been saying this for a couple of years now). Fiscal deficit is the difference between what a government earns and what it spends.

Another important reform suggested by Rajan is the setting up of an independent fiscal council, which can keep an eye on the deficit numbers (This is something that the former deputy governor of the RBI, Viral Acharya, has also been suggesting).

All in all, the government should seem like making serious moves towards restoring fiscal stability, which is currently lacking.

4) The world will recover faster than India, given that the covid-curve has been flattened across large parts of the world. Given this, economic demand in many of India’s bigger trading partners will recover faster than in India (Again, a point I made in a piece I wrote for the Mint on September 7, 2020). This means that faster exports growth can be a way for India to recover, suggests Rajan. But the trouble is that we are looking at import substitution as a policy more and more and imposing tariffs on imports. This raises the cost of inputs that go into goods that are ultimately exported.

Of course, the intermediary goods that go into the making of goods that are exported, can be produced in India, but this will happen at a higher price. Hence, this makes us uncompetitive at the global level (A point I made in a piece I wrote for the Mint in February). Also, reversing the entire import substitution bogey will mean going against the current atmanirbharta campaign, a very successful perception management campaign. (In economics, just because something sounds good, doesn’t mean it is necessarily good). Economics is not the only thing that any government is bothered about.

5) Rajan suggests that the focus on Mahamta Gandhi National Rural Employment Guarantee Scheme (MGNREGS) as a way of putting money directly into the hands of the poorest, should continue. If this means spending more money under the scheme, then so be it. (Okay, I had suggested this as far back as March in a piece I wrote for the Mint, even before the government had taken this route.)

6) While, MGNREGS takes care of the lack of economic activity in rural areas, the urban areas get left out under the scheme. Hence, the government should be making more efforts to put money into the hands of the urban poor, suggests Rajan.
One of the things that the government has done is to put Rs 1,500 over a period three months into female Jan Dhan accounts. This cost the government around Rs 31,000 crore. I think it is time to put money into male Jan Dhan accounts as well (Again, I have been saying this for months now). This will take care of the urban poor to some extent. I know this isn’t the perfect solution because proper targeting will continue to remain a problem, but it is better than doing nothing.

7) Rajan further suggests that the government and public sector enterprises should clear their dues as fast as possible. This will put more money into the economy and particularly into the hands of corporations and help them survive. (Something I had said in March). A newsreport in The Financial Express today points out that the total amount of money owed by the central government and the public sector enterprises, amounts to Rs 9.5 lakh crore, or a little under a third of the Rs 30.4 lakh crore that the central government plans to spend this year. Of the Rs 9.5 lakh crore, Rs 2.5 lakh crore is owed to the Food Corporation of India (FCI). The remaining Rs 7 lakh crore is a large amount on its own. Even if a portion of this is cleared, the economy will get some sort of a stimulus.

As far as a real stimulus goes, focusing on physical infrastructure is the need of the hour, leading to creation of demand for everything from steel to cement. One area that can really get the Indian economy going again is real estate. I have discussed this so many times before. But for that to happen, so many other things need to happen, including many of the current real estate firms going bust and banks losing a lot of money. Creative destruction needs to be unleashed. Of course, the deep state of Indian real estate is not ready for something like this and will not let it happen.

8) Rajan also suggests that firms below a certain size could be rebated the income tax and the goods and services tax, they paid last year (if not the whole amount, but at least a part of it). This could be an easy and direct way of helping smaller businesses, which have faced the brunt of the pandemic all across the world. (Okay, I haven’t suggested anything like this anywhere, from what I remember).

9) Rajan recommends that public sector banks need to be properly recapitalised as the extent of losses due to covid are recognised. I feel that if the government doesn’t have the money to do so, then it needs to let these banks raise money from the market and in the process, the government should be okay with the idea of diluting its stake. (I have written a book on this )

10) And finally, as the moratorium on repaying loans taken from banks and non-banking finance companies has come to an end, there are bound to be defaults. Here, the government should have a variety of structures in place to deal with the emanating problems, and not have a one size fits all approach. Also, in my opinion, dilution of the entire insolvency and the bankruptcy process, is really not the right way to go forward.

So, to all the where are the solutions wallahs, these were 10 solutions that Dr Raghuram Rajan has offered to the government (Actually, there are more solutions in the piece he has written, but I have stopped at ten. Some of these solutions are about land reforms, labour reforms, genuine ease of doing business reforms, etc., to improve India’s competitiveness, which keep getting made endlessly over and over again). Rajan has also said that the time to do these things is now and not wait for things to get worse.

In my writing over the last few months, I have recommended eight or nine of these solutions as well, though never put all these solutions at one place. One important solution that I think needs to be quickly implemented, is a reduction of the goods and services tax on two-wheelers.

The trouble is that most of these solutions need money to start with. And for that the government needs to come out of its comfort zone and start raising money in ways that it has never done before (like selling land). Also, all reforms need intent and communication clarity to be able to explain these things to the junta at large. Plus, they may not lead to electoral gains immediately, something like a focus on an actor’s suicide may.

You see the government just doesn’t have the incentives to do the right things.

PS: I sincerely hope this should satisfy the appetite of all the where are the solutions wallahs, out there.

Bank Lending Down by Half in 2016-2017

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On April 6, 2017, the Reserve Bank of India(RBI) published the latest Monetary Policy Report. Buried on page 40 of the report is a very interesting data point which rather surprisingly hasn’t been splashed on the front pages of the pink papers as yet.

In 2016-2017, Indian banks gave out total non-food credit worth Rs 3,65,500 crore. Banks give working-capital loans to the Food Corporation of India(FCI) to carry out its procurement actions. FCI primarily buys rice and wheat directly from Indian farmers using the loans it takes from banks. When these loans are subtracted from overall loans given out by banks, we arrive at non-food credit.

In 2015-2016, the total non-food credit of banks had amounted to Rs 7,02,400 crore. What this means that non-food credit came crashing down by close to 48 per cent during the course of 2016-2017, the last financial year. To put it simply, this basically means that in 2016-2017, banks lent around half of what they had lent out in 2015-2016.

The important question is why has this happened? A major reason for this is that the total outstanding loans to industry has actually shrunk in 2016-2017(between April 2016 and February 2017, which is the latest data available) by Rs 60,064 crore. This basically means that Indian banks on the whole, did not give a single new rupee to industry as a loan during the course of 2016-2017.

And the reason for that is very straightforward. Over the years many corporates have defaulted on the loans they had taken on from banks, in particular public sector banks. And this explains why banks are not in the mood to lend to corporates anymore. As they say, one bitten twice shy.

In fact, as on December 31, 2016, the gross non-performing assets or bad loans of public sector banks had stood at Rs 6,46,199 crore, having jumped by 137 per cent over a period of two years. Bad loans are essentially loans in which the repayment from a borrower has been due for 90 days or more. The bad loans of private banks as on December 31, 2016, stood at Rs 86,124 crore.

A major chunk of these defaults has come from corporates. As of March 31, 2016, the total corporate bad loans of public sector banks had stood at Rs 3,36,124 crore or 11.95 per cent of the total loans given out to corporates. It formed a little more than 62 per cent of the total bad loans. This is the latest number I could find in this context. There is enough anecdotal evidence to suggest that the situation has worsened since then.

Given this, as I said earlier, banks are not in the mood to lend to corporates. Hence, their overall lending for 2016-2017 has shrunk by half in comparison to 2015-2016.

The interesting thing is that while Indian banks may not be lending as much, the other sources of funding haven’t really dried up. Private placements of debt jumped up majorly in 2016-2017 in comparison to 2015-2016 and so did issuance of commercial paper by non-financial entities. Over and above this, the foreign direct investment into the country continued to remain strong. During 2016-2017, FDI worth Rs 2,53,500 crore came into the country. This was more or less similar to the amount that came in 2015-2016.

In total, the flow of financial resources to the commercial sector stood at Rs 1,262,000 crore, the RBI estimate suggests. This is around 12.1 per cent lower than the last year. Hence, the overall availability of money has shrunk but the situation is not as bad as bank lending data makes it out to be.

Basically, while banks may not want to lend to corporates, there are other sources of funding that do remain strong. Having said that, a fall of more than 12 per cent in total flow of financial resources to the commercial sector, is not a good sign on the economic front. This can only be corrected only after banks come back into the mood to lend to corporates. And that will only happen when banks get into a position where they are able to recover back from corporates a significant chunk of their bad loans. As of now no such signs are visible.

 

The column originally appeared in the Daily News and Analysis on April 25, 2017

Dear Mr Modi who will sort out the mess at Food Corporation of India?

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Data released by the Petroleum Planning and Analysis Cell(PPAC) suggests that on January 13, 2016, the price of Indian basket of crude oil touched $27.32 per barrel. I expect the government to increase the excise duty on petrol and diesel soon, to capture the benefit of this ‘further’ fall in the price of oil.

If and when this happens this will be the eight such rise since November 2014. While the government has been quick to increase excise duty on petrol and diesel in order to shore up its finances, the same enthusiasm has been missing when it comes to controlling wasteful expenditure.

Let’s take the case of the Food Corporation of India(FCI). Last week the Supreme Court was hearing a case concerning the loaders at FCI and the exorbitant salaries they draw. As the judges reacted: “The report shows that in August 2014, 370 labourers received more than Rs 4 lakh in salary. Around 400 others got between Rs 2 lakh and 2.5 lakh in the same month…How is that possible?

The judges were essentially referring to the Report of the High Level Committee on Reinventing the Role and Restructuring of Food Corporation of India (better known as the Shanta Kumar committee report). This report was released in January 2015.

In fact, as the Shanta Kumar committee report points out: “Some of the departmental labours (more than 300) have received wages (including arrears) even more than Rs 4 lakhs/per month in August 2014. This happens because of the incentive system in notified depots.

Interestingly, even those who did not get paid Rs 4 lakh in August 2014, get paid quite a lot. The average salary of an FCI worker was Rs 79,588 per month between April and November 2014, which is seven to eight times higher than what a contract labourer gets paid. As can be seen from the following table the average salary of a worker has more than doubled between 2009 and 2014.

Financial yearAverage Salary
2009-1038459
2010-1153389
2011-1263763
2012-1371358
2013-1478549
April to Nov 201479588
Source: Shanta Kumar Committee Report

As the Shanta Kumar committee report points out: “FCI engages large number of workers (loaders) to get the job of loading/unloading done smoothly and in time. Currently there are roughly 16,000 departmental workers, about 26,000 workers that operate under Direct Payment System (DPS), some under no work no pay, and about one lakh contract workers. A departmental worker (loader) costs FCI about Rs 79,500/per month (Apri-Nov 2014 data) vis-a-vis DPS worker at Rs 26,000/permonth and contract labour costs about Rs 10,000/per month.”

There are a few points that need to be made here. First, is the fact that workers are paid different wages depending on how they are categorised, even though the do the same work. Hence, an FCI worker gets paid eight times that a contract worker gets paid. This is not fair.

The second point is why pay workers close to Rs 80,000 per month for loading and unloading stuff, when the same job can be carried out at the cost of Rs 10,000 or Rs 26,000 per month? This is a clear waste of money. The Supreme Court judges put the loss at Rs 1800 crore. This doesn’t sound much on its own, given the big numbers we are used to when we talk about the government.

But compare this with the plan outlay of the ministry of environment for 2015-2016, which is at Rs 1,446.60 crore. As the budget document points out: “The Plan outlay of Ministry of Environment, Forests & Climate Change is Rs 1,446.60 crore. An Amount of Rs 758.16 crore is allocated for Ecology and Environment which, inter alia, includes Rs 63.14 crore Conservation of Natural Resources and Ecosystems, and Rs 213.05 crore for Research and Development, Rs 100 crore for National Coastal Management Programme and Rs 76.10 crore for Environmental Monitoring and Governance.  Rs 150 crore has been provisioned for National Adaptation Fund for Climate Change.”
The point being there are better ways of spending money than paying an FCI worker Rs 79,500 per month.

Also, it is not surprising that those making Rs79,500 per month or more, get cheaper contract labour to do their work. If I was earning Rs 4 lakh per month and was in a position to outsource my work to someone at the cost of Rs 10,000 per month, I would do the same thing.

As the Shanta Kumar committee report points out: “Some of the departmental labours (more than 300) have received wages (including arrears) even more than Rs 4 lakhs/per month in August 2014. This happens because of the incentive system in notified depots, and widely used proxy labour. This is a major aberration and must be fixed, either by de-notifying these depots, or handing them over to states or private sector on service contracts, and by fixing a maximum limit on the incentives per person that will not allow him to work for more than say 1.25 times the work agreed with him. These depots should be put on priority for mechanization so that reliance on departmental labour reduces.”

The Supreme Court judges have given the government a time of 10 days to respond on how this daylight robbery of the country can stop. “Labourers in FCI have an aggressive past. Officers have been murdered. There is a clique that is operating there and FCI has become a hen that lays golden eggs for them. The FCI is literally held to ransom by the labourers and their unions and there is something seriously wrong with it,” the Supreme Court judges said.

The prime minister Narendra Modi before he became the prime minister talked a lot about “minimum government maximum governance”. This is one area where the slogan can be put into practice. The loot of the nation by a few thousand workers of the FCI needs to stop. The money thus saved needs to be put to better use.

The question is will this stop? The trouble is that after being elected Modi has continued with the maximum government handed down to him. Any elected official (or for that matter even any individual) has limited time and mind-space to tackle things. This is even more true for this government, where the lack of ministerial talent is glaringly obvious and the government is run more and more by the prime minister’s office.

The prime minister’s office is busy with many things, propping up loss making units like Air India and MTNL, being among them. In this environment does it have the time and the mind-space to tackle the mess that FCI is in?

The column originally appeared in the Vivek Kaul’s Diary on Equitymaster

Government of India must stop hoarding food

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Vivek Kaul

Food inflation has been an issue of huge concern over the last few years. In a recent report titled What a waste! Crisil Research points out that “food inflation has averaged 8.1% in the last decade, and over 10% in recent times.”
This when agricultural growth has been robust and our granaries continue to overflow. Agricultural growth over the last decade stood at 3.6% per year, in comparison to 2.9% per year, in the decade before that. Hence, the conventional argument that food inflation is a result of not enough supply in comparison to demand, doesn’t totally hold.
The Food Corporation of India (FCI) puts out a number indicating its food grains stock every month. As on June 1, 2014, the food grain stock, which includes rice, wheat, unmilled paddy and coarse grains, stood at 74.8 million tonnes. At the beginning of June 2008, the stock had stood at 36.4 million tonnes.
This indicates that the government through FCI has bought and hoarded more and more of rice and wheat produced in the country. In a May 2013 research report titled Buffer Stocking Policy in Wake of NFSB (National Food Security Bill) written by Ashok Gulati and Surbhi Jain of the Commission for Agricultural Costs and Prices(CACP) it was estimated that anywhere between 41-47 million tonnes, would be a comfortable level of buffer stocks.
This would be enough to take care of the subsidised grain that needs to be distributed to implement the food security scheme. At the same time it would also take care of the strategic reserves that the government needs to maintain, to be ready for a drought or any other exigency.
The current level of food grains with the FCI is significantly more than 41-47 million tonnes. One impact of this is that the government spends money in buying the “extra grain” which it does not require. This adds to the government expenditure and in turn the fiscal deficit. The fiscal deficit is the difference between what a government earns and what it spends. The CACP authors had estimated that an excess stock of 30-40 million tonnes would cost the government anywhere between Rs 70,000 to Rs 92,000 crore.
The main reason for this “extra procurement” is the fact that the Congress led UPA government kept increasing minimum support price(MSP) of food grains over the years, at a fast pace. In 2005-2006, the MSP for common paddy(rice) was Rs 570 per quintal. By 2013-2014 this had shot up to Rs 1310 per quintal, an increase in price of around 11% per year. In comparison, between 1998-1999 and 2005-2006, the MSP of rice had increased at the rate of 3.8% per year.
In case of wheat the MSP has gone up by 14% per year between 2005-2006 and 2013-2014. In comparison, between 1999-2000 and 2005-2006, the price had gone up by 4% per year.
In fact, the decision to increase the MSP was totally random. A report released by the Comptroller and Auditor General in May 2013 pointed out that “No specific norm was followed for fixing of the Minimum Support Price (MSP) over the cost of production. Resultantly, it was observed the margin of MSP fixed over the cost of production varied between 29 per cent and 66 per cent in case of wheat, and 14 per cent and 50 per cent in case of paddy during the period 2006-2007 to 2011-2012.”
Other than the government expenditure shooting up, the rapid increase in MSP has led to more and more food grains landing up with the government. The FCI does not have enough storage capacity for this grain. This is one reason why newspapers frequently carry pictures of food grains rotting, lying in the open. “Between 2005 and 2013, close to 1.94 lakh tonnes of food grain were wasted in India, as per FCI’s own admission in the Parliament,” the Crisil report points out. Rice formed 84% of the total damage.
Further, the excess procurement has also led to high inflation, as a lower amount of rice and wheat have landed up in the open market. The CAG report points out that in 2006-2007, 63.3 million tonnes of rice landed in the open market. By 2011-2012, this had fallen by a huge 23.6% to 48.3 million tonnes. The same is true about about wheat as well, though the drop is not as pronounced as it is in the case of rice. In 2006-2007, the total amount of wheat in the open market stood at 62.1 million tonnes. By 2011-2012, this had dropped to 61.4 million tonnes.
Also, with MSPs going up every year at a rapid rate, “the cropping pattern” the Crisil report points out “has been biased towards food grains like rice and wheat, and have led to excessive production”.
Given this, one way of bringing down food inflation is the government releasing stocks of rice and wheat into the open market. One problem here can be that the procurement is concentrated in a few states. In case of wheat these states are Punjab, Haryana and Madhya Pradesh. And in case of rice, these states are Andhra Pradesh, Chattisgarh and Punjab. Hence, stocks will have to be moved from these parts of the country to other parts. More than that the government needs to stop procuring more than what it needs to run its various programmes. This will be beneficial from the fiscal deficit front as well as help moderate inflation.
This becomes even more important given that the India Meteorological Department expects the monsoon to be below normal at 93 per cent of the long period average. In this scenario, the production of grains is expected to take a hit. If the government continues with excess procurement, less grains will land up in the open market and push prices further up.
Also, when it comes to production of food products like milk, milk products, egg, fish and meat, supply has been lagging demand. The production has risen only at the rate of 3-4% between 2009-2010 and 2012-2013, whereas the price has risen at the rate of 14-15%, the Crisil report points out. This needs to be addressed.
When it comes to fruits and vegetables, the Agricultural Product and Market Committee(APMC) Act was passed to help farmers. Instead, it has made them vulnerable to traders backed by political parties. The huge increase in price of onion last year, despite a small fall in production is an excellent example of the same. The trader cartels need to be broken down.
These steps need to be taken if food inflation has to be controlled in the time to come.

 The article originally appeared in The Asian Age/Deccan Chronicle on June 17, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected]