Direct interest subsidies to farmers a good idea
Finance secretary Ratan Watal has done well to talk of the need to revisit interest subvention schemes, such as those given to farmers and to exporters, and suggest that the incentives be given directly to farmers so as to ensure lending rates are not distorted. If this is done, farmers and/or exporters will pay the market rate for loans while the interest subvention will be directly credited to their bank accounts, perhaps using the Aadhaar-based direct benefits transfer. The need to do this, however, goes far beyond just the need to not distort the market for lending rates. As in the case of other subsidies, interest subsidies also have considerable leakages and studies show that anywhere between 30% and 40% of such loans get diverted by either farmers or middlemen to others—in which case, the government would also want to revisit the priority sector lending targets to see whether such a large proportion of loans should be earmarked for this type of lending.
A study by Anwarul Hoda and Prerna Terway of ICRIER found, last year, that if you total up the cost of agricultural inputs including labour in various years, the proportion funded by short-term bank credit rose from 16.8% in FY98 to 84% in FY12 and to a mind-boggling 100% in FY13—if all of agriculture’s short-term credit needs are taken care of by banks, Hoda-Terway asked how 44% of loans to agriculture (mostly short-term) could also be coming from the non-institutional sector? In other words, it is likely that a large part of subsidised short-term credit is simply being deposited by farmers in fixed deposits to get the interest arbitrage. More recent analysis of farm credit by Ashok Gulati and Terway in their article in this newspaper on Monday found that there is a sudden spike in farm loans in the last quarter of the financial year—this usually adds up to around 60% of total credit given during the year—when there is hardly any agricultural activity in the March quarter.
Once the interest subvention is given directly, farmers will see no benefit in taking market-interest loans from banks and passing these on to other borrowers. Indeed, working on DBT also allows the government to prioritise such interventions—they can, for instance, be reserved for smaller farmers instead of being hogged by the larger farmers; they can also be targeted to certain regions, such as West Bengal and Bihar, if the government wants to encourage more farming in these areas. Indeed, if even fertiliser and power/water subsidies are given directly to farmers and these inputs are then priced at market rates, this will improve efficiency in two ways. First, firms producing fertilisers will be forced to compete with the most efficient as, with the subsidy already in the bank account, the farmer will choose to buy from the most efficient producer including, possibly, those from overseas. Two, once the farmer is paying for the input from his pocket, he will tend to use it more carefully.