Mains Paper 3: Economy
Prelims level: Property tax
Mains level: Agriculture related issues
• Farm distress has been a sadly persistent feature for the past five years, the initial two years on account of failed rains, but in the last three years because of policy failure on a number of fronts, including, most visibly, unremunerative prices for farm produce.
• That it shapes electoral outcomes has also been known since, at least, the Gujarat elections.
• What is new with the recent five state elections is that a particular palliative, farm loan waivers, is now seen as a necessary promise for electoral victory.
Dealing with property tax repeal
• A useful parallel to recall is the common practice 10-15 years ago, when electoral manifestos for state elections routinely promised to do away with property taxes.
• That crippled the ability of urban municipalities to collect the only tax that falls within their fiscal domain, and was a major factor underlying urban decay.
• The 13th finance commission curbed this practice by requiring that states enact irreversible rights of levy of the property tax for municipalities within their jurisdictions, in order to qualify for receipt of local government grants from the centre.
• That then forced political parties to think through the promise of property tax repeal, and to recognize that it only benefited a small class even within the urban sector, which actually owned property.
• The electoral gains of such a promise were clearly insignificant.
• Today, property tax repeal is absent from electoral manifestos.
Benefits from loan wavier
• A farm loan waiver similarly benefits only farmers who have access to formal credit, by virtue of having the necessary ownership documents commonly estimated at 30% of farmers (varying across states).
• So, a waiver becomes a further benefit accorded to a minority that had privileged access to a bank loan in the first place.
• The privilege accrues from the massive interest rate differential between formal and informal credit.
• The remaining 70% will be a mix of owners who do not have title because of registration barriers, and tenants.
• Whatever the mix, the issue of interest is why farm loan waivers carry such widespread electoral support among them.
Limitations of formal credit system
• The picture of access to formal credit is somewhat muddied by another popular estimate based on National Sample Surveys (NSS), that the share of institutional credit in total farm borrowing is roughly two-thirds.
• That is the share of total borrowing to put together with the 30% figure for farmers with access, it shows how skewed the formal credit flow is.
• Minimum support prices (MSPs) are widely thought to be inferior to income support schemes, but the only example of an income support scheme currently in place.
• Rythu Bandhu in Telangana, is also payable only to farmers with ownership documentation, issuable by the village patwari who holds land records in his register.
• Farm loans from the formal banking sector, which qualify for waivers, are basically working capital loans covering input costs for a season, and are hypothecated to the crop and not to the land.
• Even so, tenant cultivators without ownership documents cannot access bank loans, and with the coupling of bank loans to crop insurance, the exclusion boundary has only become tighter.
• Their only recourse is informal credit supplied by moneylenders, who in the rural context would be mostly large farm owners, supplemented perhaps by owners of rural industries like flour mills.
• After demonetization, interest rates on informal credit markets would have shot up everywhere because of the supply crunch.
• Rates would have come down slowly thereafter as demand for credit also went down with the closure of small-scale industrial and trading activity, and moneylenders built up their cash funds again.
• But even so, the gap between formal and informal rates will be much higher today than it was before demonetization.
• A loan waiver essentially transfers cash into the hands of farm-owning moneylenders.
• It is paid directly to banks, but farmers get to keep the cash otherwise payable by them to banks.
• This then improves the flow of loanable funds in the market for informal credit, and promises to lower rates, thereby explaining the widespread support for loan waivers even among farmers excluded from formal credit, and the rising incidence of these waivers post demonetization.
• In 2018 alone, six states announced waivers four after the recent round of elections and two before. In the previous year, there were four.
• What makes these significant is that they happened in years of good rain and abundant harvest.
• By contrast, in 2014 and 2015 (back-to-back drought years preceding demonetization), there were only two and one waivers, respectively.
• In a situation where banks themselves are severely stressed, higher risk in agricultural lending cannot be loaded onto them.
• Banks now recognize shares, as certified by the patwari, in ownership of ancestral land, even without formal identification of the boundaries of the land held by the borrower.
• That is about as far as banks can be expected to go. Owners are locationally rooted, tenants are not.
• All the recent reforms mooted on the farm credit front, from raising the limit on Kisan Credit Cards to speeding up payment on crop insurance, have that pile-on quality.
• They do not address the needs of farmers for whom formal credit doors are firmly shut.
Q.1) ‘Investment Trends Monitor’ report is a publication of:
A. World Bank
Correct Answer: B
Q.1) How the recent reforms mooted on farm credit do not address the needs of farmers for whom formal credit doors are shut?