"Not Loan Waivers": Raghuram Rajan On What Will Solve Farm Distress

Reserve Bank of India governor and economist Raghuram Rajan says it is not a solution to the long-festering distress in the sector.

What the sector needs, instead, Raghuram Rajan said, is increased investment. (Reuters)

New Delhi:

The election season, almost always, is flavoured with populist promises. To address rural distress, which is a top election issue this time, repetitive sops such as farm loan waivers and increased MSPs have been promised by both of the country's national parties.

But former Reserve Bank of India governor and economist Raghuram Rajan says it is not a solution to the long-festering distress in the sector.

Fiscal transfers in terms of loan waivers, Mr Rajan suggests, are not the best way of addressing it. "I have written to the Election Commission saying loan waivers should be taken off the table."

"Only a sub-set of farmers get these loans, in any case, and so often they go to the best connected farmers than the most poor. It also creates enormous problems for the fiscal of the state once those waivers are done", Mr Rajan said at an event to release an economic agenda for the government over the next five years.

What the sector needs, instead, Mr Rajan said, is increased investment and structural reform in agricultural and land policies. "We need to make the agricultural sector a more vibrant industry, instead of one that needs to be propped up through transfers."

Loan waiver announcements in an election year, then, are "the easiest short term measures", but seriously impede a political party's ability to take a long term view once it does come to power, he said.

"The political system today has a limited set of options. The only way for them to show they're pro agriculture, but they're the easiest short term measures," he said.

In a note outlining an economic strategy for India, Mr Rajan, along with 12 other economists, has emphasised that loan waivers divert resources from much-needed public investment.

"A policy priority should be to reduce distortions in farm product prices as well as input prices. Another important enabler is technology, both in educating and informing farmers, as well as in opening access to markets", said the report.

In his report on Agricultural Reform, economist Neelkanth Mishra said, "the central government  must creatively use incentives to change/influence stare-level policies", since agriculture  is a state subject.

To that effect, some of his suggestions included short-term measures like targeting monopolies in  the supply chain and enhancing the Pradhan Mantri Fasal Bima Yojana, while several medium-long term measures including standardizing mandi-level infrastructure, encouraging  agricultural  exports, addressing gaps in the public irrigation system, and expanding the E-NAM, which is the electronic national agricultural  market. Currently, E-NAM volumes are only 25 per cent of India's total agricultural output. 

Noted agricultural economist Ashok Gulati in an earlier interview to NDTV also labelled these freebies and higher MSP promises "band-aid solutions" to a much deeper crisis.