Reality Check: Were Indian Farmers Really Robbed Of Rs 45 Lakh Crore?

The National Democratic Alliance government, worried about its electoral fortunes in the 2019 general elections, is said to be preparing a special farm package that could be a part of the budget to be presented on 1 February.

While there is little doubt that farmers are in distress, it is highly unlikely that any government will do the one thing that will benefit farmers the most: removing trade and marketing restrictions that will allow them to realise a higher price for farm produce.

Agricultural economist Ashok Gulati has, in an article in The Indian Express, computed a scary figure of Rs 45 lakh crore as the amount “plundered” from farmers over the last 17 years due to these restrictive policies. Says Gulati: “…Indian farmers have been ‘implicitly taxed’ through restrictive marketing and trade policies that have an in-built consumer bias of controlling agri-prices. If one calculates the sums involved of this ‘implicit taxation’, it amounts to Rs 2.65 trillion (Rs 2.65 lakh crore) per annum, at 2017-18 prices, for 2000-01 to 2016-17. Cumulatively, for 17 years, this comes to roughly Rs 45 trillion (Rs 45 lakh crore) at 2017-18 prices. No country in the world has taxed its farmers so heavily as India has done during this period.”

There is surely some degree of exaggeration in this figure, for the other side of the picture is that no country has subsidised its farmers to the same extent, whether it is in terms of fertilisers, power, diesel, seeds, or even credit and crop insurance. If one were to look at the last Union budget (2018-19), the subsidies on food and fertiliser alone work out to around Rs 240,000 crore, and interest rate subventions add up to another Rs 15,000 crore. And we are not even counting the other subsidies and free power provided by most state governments, apart from periodic farm loan waivers and other such follies.

Gulati says that minimum support prices (MSPs) do not benefit more than a handful of farmers, as production glut and limited procurement keeps market prices below MSPs. But even if more agri-produce is procured, it won’t benefit more than 20 per cent of peasants. As for loan waivers, barely 30 per cent of farmers will benefit. And even the Telangana-type of income support scheme, where farmers are paid Rs 4,000 per acre for two seasons a year, may be unsustainable given its high costs (Rs 12,000 crore). It benefits big farmers more and tenants get left out. An Odisha scheme tries to address these limitations by focusing the payments on small and marginal farmers (those with upto five acres of land), and including tenants and labourers among beneficiaries. It seems much better designed, but will still prove very costly (Rs 10,000 crore over three years).

Gulati’s analysis is not necessarily water-tight. The key questions that remain are the following:

One, while improving market access and removing barriers to export trade will improve farm incomes, it will not obviate the need for government interventions in a political economy. If prices crash, farmers will demand support prices, and if they soar, consumers will demand subsidies. While large farmers may be able to insure themselves or sell in the forward markets, small farmers will still need support. Changing policies to make agriculture more market-oriented will not eliminate all subsidy costs to the sector.

Two, if food subsidies are really a prop to the consumer rather than the farmer, this cash should be paid out to the urban poor so that they can buy their food at market prices. But can small and marginal farmers benefit from the new market prices, when power shifts to the big traders and wholesalers who have the ability to hold inventories?

Three, the downside of opening up the agricultural export market is that we will also have to open up our import markets as well – which can bring new uncertainties for domestic farmers.

The only logical way out of this quagmire is to do three things simultaneously, but spaced out to avoid short-term disruptions: first, open up the internal markets and only then the export ones; next, steadily reduce subsidies (say, by 10 per cent every year) and use the savings to invest in farm infrastructure and related areas; and third, ban farm loan waivers once and for all, and use the money saved for investment in non-farm projects in rural areas and promoting rapid urbanisation.

In a publication co-authored by Gulati, Supporting Indian Farms The Smart Way, the authors suggest that while input subsidies in Indian agriculture now amount to 8 per cent of agricultural GDP, public investment in agriculture (irrigation, agri-R&D, roads, warehousing, etc) has slumped from 3.9 per cent of agri-GDP in 1980-81 to just 2.2 per cent in 2014-15.

The authors estimate that farm poverty reduces five to 10 times faster if the money now spent on subsidies were to be substantially routed to investments. Most subsidies are money down the drain.

Farmers are being ruined by higher subsidies. The real story is not that they have been plundered of Rs 45 lakh crore, but that the money intended to benefit them actually ended up ruining their future because politicians sought short-term electoral benefits from waivers and giveaways. Farmers were fed the fish of freebies, when they could have earned better from being taught how to farm fish better.

To repeat: The solution to farm distress is not more cash to farmers or higher MSPs or more farm loan waivers, but more investment in agriculture and the creation of non-farm and urban jobs for farmers who need to get out of the farm.