Farm income scheme better alternative to loan waivers, MSP: Chief Economic Adviser

By Vishav & Manish Gupta

New Delhi, Feb 5 (IANS) As political parties fight over pro-farmer schemes ahead of the Lok Sabha elections, Chief Economic Adviser Krishnamurthy Subramanian says farm loan waivers are an economically unsound solution and that not only their benefits are cornered by "not-so-deserving borrowers" but they also create a moral hazard.

The CEA also rejects opposition criticism that the Direct Income Support (DIS) of Rs 6,000 annually for small farmers, announced in the Interim Budget, translates to a meagre Rs 17 a day, saying it is a "well thought through" programme. One should also look at what small and marginal farmers earn per day at present before making any assessment, he feels.

"Loan waivers create a lot of problems. I won't compare those. Economically, I don't look at loan waivers as a good solution. In contrast, an income support to farmers makes more economic sense," Subramanian told IANS in a post-budget interview.

Congress President Rahul Gandhi, who had promised loan waiver schemes before the recent Assembly elections, has now pledged to bring one such scheme across the country if his party is voted to power in the Lok Sabha elections.

Subramanian, who succeed Arvind Subramanian to this post in the middle of budget preparations, said a study of the UPA debt waiver had revealed that a bunch of benefits were cornered by not-so-deserving borrowers.

"As it is, loan waivers can reach only those farmers who have taken a loan and are, therefore, part of the formal financial system. What we found was that not only benefits are cornered by undeserving borrowers but it creates a moral hazard as well because those borrowers who did not deserve it - their loan performance deteriorates," he said.

"And despite any amount of assurance or directions from the government, at the ground level, loan officers are very reluctant to give credit after the debt waiver. So the credit cycle also gets affected. In contrast, this (PM-KISAN scheme) is not a loan but an income."

The CEA said income support was even better than the MSP programme as it does not influence the crop cycle.

He said the MSP, as an intervention, affects cropping patterns because farmers tend to grow more of those crops whose support price is higher.

"In contrast, an income transfer like this will give money in the hands of the farmers and they can make that portfolio choice based on information that they have best about what to grow and what not to. So you are not influencing that choice by farmers," he said.

About comments that the Rs 6,000 amount is too small, Subramanian said one should look at some numbers before they actually make those assessments.

Soon after Finance Minister Piyush Goyal made his Budget speech on Friday announcing direct income support of Rs 6,000 each to poor and marginal farmers, Congress President Rahul Gandhi responded that giving them Rs 17 a day was an "insult" to everything the farmers stood and worked for.

The CEA said that as per NITI Aayog's doubling farmers' income report, the average earning of a farmer comes to about Rs 45,000 a year.

"This is the average income. But this scheme is targeted at farmers who are actually small and marginal with landholdings up to two hectares," he said, adding their incomes are much lower than the average - between Rs 35,000 and Rs 36,000 annually.

"So Rs 6,000 on that base is actually over 16 per cent of their annual income, which is not a trivial amount... When you say this much amount per day, you also have to look at what is his earning per day now and then look at it as a percentage," he added.

"Also, you have to remember that the basic problem in agriculture in India is that the risk-return trade-off is very unfavourable. The risks and uncertainties are huge but return is not that commensurate. What this scheme does is because it's an assured income every month, it really takes care of the uncertainty," Subramanian added.

He said in those months when a farmer gets lower income, this assured income would reduce his risk and he can plan his expenses on the basis of the assured income.

"With volatility in income, that planning cannot happen. But with this scheme, planning can happen and risk goes down," the CEA said.

Subramanian also defended the government's decision to announce the scheme as part of the Interim Budget saying the farm sector needed intervention.

"We have a population growing at less than 1 per cent, but the farm produce is growing at over 3 per cent. So invariably you would have 2 per cent additional surplus. And that surplus builds up. And when you have surplus, you have low prices.

"From an economic point of view, this is the sector that needs intervention. And therefore there is economic rationale for doing this," he said.