Innovation in Farm Relief for Uttar Pradesh

By Sarah Watson —

Source: WBKPhotography’s flickr photostream, used under a creative commons license.

The recently-installed government of Uttar Pradesh (UP) has made a loan waiver for small and marginal farmers a top priority. Loan waivers are a popular solution for Indian governments trying to shore up support among the crucial agricultural constituency. But they are inevitably short-term solutions, as farmers rapidly find themselves in debt once again. By instead taking an innovative approach to rural relief — making investments in technology, infrastructure, or skills — UP has a chance to permanently transform the rural landscape and avoid future demands for loan waivers.

The basic logic of waivers is simple: on average Indian farmers owe more than seven times their monthly income, and the 31 million farmers cultivating less than an acre owe an average of $375. At the end of the month India’s average farming family has $3 left over, meaning that it can take years to pay back even small loans. Moreover, India’s farming constituency is massive, making it an irresistible voting block for state and national politicians.

But as Ashok Gulati has pointed out, if debt were the sole issue facing farmers, then the $10.7 billion national loan waiver of 2008-09 should have ended rural distress. Instead, farmers face deep-seated structural problems that bring them into debt again and again. Agricultural gross domestic product  has grown an average of 1.7 percent per year for the first three years of Prime Minister Modi’s administration, yet two-thirds of Indian farmers work tiny, economically unproductive plots of less than 2.5 acres. Farmers face difficulties fetching competitive prices due to India’s monopoly approach to farm marketing, and a lack of cold storage chains make higher-yield crops economically risky. Perhaps most importantly, Indian governments are reluctant to push reforms, like mechanization, that would increase agricultural productivity because there are currently too few non-agricultural jobs to absorb laborers made redundant by capital-intensive modes of production.

The UP loan waiver is an expensive proposition; the center has already made clear that it will not offer financial support for the plan, which could cost the already-indebted state more than $4 billion dollars. So what else could the UP government do with its $4.1 billion?

For the same amount the state could buy 1.34 million one-horsepower solar-powered irrigation pumps. These pumps cost about $152 less per year to run than the more common diesel pumps — a direct cost savings of over $200 million a year for the state’s farmers. That may not seem like much, but an average Uttar Pradesh farmer cultivating between 1 and 2.5 acres owes only $333 dollars. Farmers on the grid would not benefit as much, since they already pay almost nothing for power, but the state would reap significant savings by reducing the amount of free or nearly-free electricity it has to provide rural consumers.

UP has 23.3 million agricultural holdings, of which 92 percent (21.6 million) qualify as marginal or small. A solar pump scheme at this scale would not benefit all farmers, and even those who did receive pumps would have to save over time in order to pay down their loans. If the state government wants a program with more immediate effect, it could use the $4.1 billion to multiply national government spending on the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) by a factor of six. In the current fiscal year the center has so far spent $625 million in Uttar Pradesh to employ over 6 million residents for an average of 25 days each, at average wages of a little over $2 per day. Adding $4.1 billion to the budget would allow UP to employ more than 42 million people for 25 days each, or nearly two people from each small or marginal farming household.

MGNREGS is a controversial scheme, and performing manual labor for low wages is not a desirable end state for India’s workers. But those who have most closely observed the program’s outcomes argue that it creates useful infrastructure for villagers and offers an appreciable return on investment — neither of which a loan waiver accomplishes. Expanding MGNREGS would involve the crucial acknowledgement that most agricultural households are also wage-earning households: throughout India, income from wages outweighs income from cultivation for households with less than an acre, and even households cultivating as much as 10 acres still make a significant portion of their income from outside labor.

The most impactful policy, however, would address the state’s small and marginal farming households as a workforce whose future lies off the land. UP farming households with even 2.5 to 5 acres (in the top tercile of Indian farms) make less than $90 a month from cultivation; even if these farmers were debt-free they might wish to seek more lucrative employment. To do that, they will need marketable skills. $4.1 billion is nearly nine times the entire national budget for skills development in the upcoming fiscal year and nearly two-thirds of UP’s entire education budget. The central government aims to train 10 million young people over four years under the Pradhan Mantri Kaushal Vikas Yojana, with a budget of 178 million in the upcoming year; if the center can train one person for $71 dollars per year, than with $4.1 billion UP could train more than 57 million — a quarter of the state’s population. That’s enough to train two or three people from every small and marginal farming household.

None of these solutions will immediately end rural distress. But neither will a loan waiver. After all, more than 70 percent (see page A-1433) of small farmers owe money to a moneylender or a family member rather than a bank; their debt will not be touched by the waiver. But by thinking boldly about rural relief, the UP government has the chance to make an investment in the future and improve farmers’ lives at the same time.

Ms. Sarah Watson is an associate fellow with the Wadhwani Chair in U.S.-India Policy Studies at CSIS. Follow her on twitter @SWatson_CSIS.

Sarah Watson

Sarah Watson

Sarah Watson is an associate fellow with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.

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