शनिवार, १७ जून, २०१७

Farm loan waiver, why? Another crisis for Maharashtra?

Everywhere, everyone is debating and explaining his/her opinion on Maharashtra farm loan waiver. I am just trying to explain it with some data and evidence. Before discussing the FUTURE OF MAHARASHTRA ECONOMY, I would like to explain an importance of credit in agriculture sector.

Attempts to strengthen Indian agriculture must address not only farm production (farmers) but also processing, marketing, trade, and distribution. We must link farmers to markets. In this endeavor, marketing and rural credit systems are extremely important. (Acharya, S. S. (2006). Agricultural marketing and rural credit for strengthening Indian agriculture.).
The agriculture sector of Pakistan still suffers from low productivity, expensive financial support to the farmers, inefficient market structure and improper research. Thus to develop farming sector and to increase the farming efficiency it was recommended to enhance the accessibility of small and marginal farmer to formal agricultural credit. Loan for the livestock should be enhanced and this would definitely enhance farmer’s income and ultimately would reduce poverty (Ayaz, S., Anwar, S., Sial, M. H., & Hussain, Z. (2011). Role of agricultural credit on production efficiency of farming sector in Pakistan-a data envelopment analysis. Pak. j. life soc. Sci, 9(1), 38-44.)
Adequate availability of credit on time is an important requirement for the rural people, particularly under conditions of scarcity of resources and uncertainty. Convenient and safes-saving facilities are perhaps even more important to smooth out the peaks and troughs in incomes and expenditures in the rural arena. Lack of savings facilities also force families to rely on inefficient, inconvenient and costly alternatives. Agricultural credit can be a solution for this perspective. (Islam, A., Islam, D. R., Siddiqui, M. H., & Karim, L. (2014).

Importance of agricultural credit for rural development of Bangladesh: A descriptive approach. International Journal of Economics, Finance and Management Sciences, 2(1), 68-83.)

How agricultural credit should be provided? The famous agricultural economist Louis Tardy (1938) has laid the following criteria for good system of agricultural credit.
1. Credit should be granted for a sufficiently long period commensuarate with the length of operation, which it is designed to facilitate.
2. It should be granted at a reasonable rate of interest.
3. It should be adequately secured to avoid any abuse of credit facilities, but the security need not necessarily be material.
4. The security should, if necessary, be in the form of a personal credit secured mainly by the borrowers’ socio-moral standing and farming ability.
5. It should be related to the average yield and capacity for repayment of the farms, particularly during period of economic depression.
6. It should be placed in the hands of institutions the directors, which have received special training and had actual banking experience (http://shodhganga.inflibnet.ac.in/bitstream/10603/96016/12/12_chapter%203.pdf)
But if you observe our credit system in rural area, either people are engaged in informal sector where no one cares about these rules or formal sector is not interested to imply these rules. So it is not just about farm loan. It is about our credit system who forces our farmers into life time debt.
One might say that there are so many people who are not farmer but still getting benefit of agriculture scheme. Again it is not a problem of agriculture schemes. This problem is related to the system in which everything is implemented.
Again one might say that this announcement of government will throw our state in financial un-stability. Or government might increase tax rate to pay that amount.. Yes it might happen but there are so many other ways to finance given amount.

First of all I would like to discuss the finance condition of Maharashtra. 

First two diagrams show that the fiscal deficit and debt of Maharashtra state are very large. This might prove above point that it’s not good for our state. But if we see another two diagrams then you will realize that Maharashtra is in good shape. 

Debt as % of GSDP and fiscal deficit as % of GSDP both are not too bad. So we can afford this announcement. But this credit is very important as far as agricultural growth is concerned. If we have good monsoon this year, new credit will definitely help this sector (more than the given cost).. But this is not a permanent solution. We have to take some steps towards market reform. Market failure is not because of production or input it just because of unnecessary regulations which are imposed on farmers which are continuously reducing the realization of price for farmer.

शनिवार, २२ एप्रिल, २०१७

Farm loan waiver - Reasons, rationale, impacts and alternatives

Farm loan waiver.. Why farmers are demanding? Is this demand of farmers beneficial for them? If not then what should be a proper demand?
Let’s discuss. Figure no. 1 shows the percentage share debt of cultivator household. It is increasing continuously. In 2004, there were 50% indebted farmer households in whole India (figure no. 2).

Figure no.1 

Figure no. 2

Current numbers are very bad. About 52 percent of the agricultural households in the country were estimated to be indebted in 2012-13. Andhra Pradesh (92.9 %), Telengana (89.1 %) and Tamil Nadu (82.5 %) are suffering from worst condition. 60% of total loans were institutional which were linked to government (2.1%), co-operative society (14.8%) and banks (42.9%) (situation assessment survey of agricultural households 2012-13). So with this high number, given demand is obvious.

Figure no. 3

Now figure no.3 shows that the cost of cultivation and production of major crops in major states in India is continuously increasing. But the income is not increasing with that trend (situation assessment survey of agricultural households 2012-13). So burden on farmer is increasing.

Figure no. 4

The value added in agriculture sector is declining and the number of employed person per number of agricultural population is very low (figure no. 4). Therefore the anger in agricultural sector is obvious. But is this demand beneficial for them? We know that in 2008, massive Rs 76,000 crore farm debt waiver announced by the government. But it didn’t help to improve the condition in given sector. We saw that the cost is increasing continuously even after 2008 and returns on that commodity is not increasing. It means productivity in given sector is still low. With that the gross capital formation in given sector is declining while public GCF is very low and private GCF is not improving (even after 2008) (figure no. 5).

Figure no, 5

It means that the given policy didn’t help to increase the investment in agriculture. Certain studies have also shown that the credit has ambiguous impact on agriculture growth. The farmers who were able to reply, they also tried to take benefit of that announcement which created more problems in banking system. So then what should be a proper demand? I think in agricultural sector, the main problem is in marketing system. The regulations in given sectors are restricting farmers from taking the benefits of the international markets or simply global agricultural market.

Figure no. 6
Source - department of agriculture and cooperation 

Figure no. 6 shows that the regulated markets are spending more on administration and salaries, not on infrastructure and productivity. So these expenses are not productive. With these markets are not helping to minimize the post-harvest losses (figure no. 7). Figure no. 8 shows that the MSP is very low compare to international prices (I have used import value and export value for international prices). So if farmers are allowed to take part in international market, then they will get more profit.

Figure no. 7
Source - Final Report of Committee of State Ministers

Figure no. 8
Source - World bank and agriculture ministry

In given situation, the charges in APMCs which are paid by farmers are also (fig. no. 9). So the realization of the prices of agricultural commodities for farmer is very low.

Figure no. 9
Source - price policy report on Rabi crops. 

So farmers should demand a reform in marketing system. They are producing enough, they are incurring more cost but they are not getting enough returns on that. That’s why they are facing more trouble. So instead farmer should demand direct money transfers so that they will increase their investment in agriculture and even they can minimize the cost on input. So waiving loans is not beneficial in long run. The charges or cost in marketing should be minimized. But it is true that the farmers are facing some dangerous problems. There are some alternative solutions which government should use.

गुरुवार, २ फेब्रुवारी, २०१७

From Competitive Federalism to Competitive Sub-Federalism: Cities as Dynamos

Competition among ULBs.. 
CEA wants more competitive urban local body to tackle the problems of urban areas and cities. It sounds good. But will it solve the problems? Let’s see. We should focus more on the root of given problem. The stagnated primary sector and low wages in rural area is the main reason. There are several models on migration (Lewis model of migration, Harris-Todaro model etc.). Logic is very simple. People will move from one sector to another (or from rural to urban) until the wages in both sectors (both areas) get equated. But problem is that the rural wages and agricultural (and wages in primary sector) are increasing but as urban formal sector’s (and tertiary and secondary) wages are also increasing. So they are not being equated by any kind of transformation.

We can see the difference between daily wages in agricultural and non-agricultural sector. And that difference is actually expanding informal sector which is responsible for low standard of living. We are spending too much on rural development and infrastructure. In fact government’s main aim is to double the farm income. (With given growth rate of agriculture, it seems to be a dream only. If this aim is achieved then there is no requirement to focus more on urban area.). 
Just have a look on the spending on rural development and agricultural activities. 

Then why still we have same problem? I think our institutional framework is the main problem. Present institutional framework is not successful as far as supply chain in rural area is concerned. It’s crystal clear that there are leakages in NABARD. There is no growth of any other sector in rural area. We failed to make agri-industry, we failed to establish any kind of market mechanism through decentralization. That means our framework must be changed. Let’s take an example of Philippines’s Rural Development Project. The aim of this project is same i.e. increasing rural income and enhancing farm and fishery productivity in targeted areas by supporting smallholder and fishers to increase their marketable surpluses and their access to markets. Important thing is that local government is also responsible for infrastructure. And that thing we don’t have. Local governments are doing nothing for rural infrastructure. 

Figures give the overview of the project. So funds are important but there should be a proper framework like RDP. Local government should be encouraged to build their own infrastructure but our rural local bodies are built for political purpose only. 

Last thing is that under GST, how can we encourage ULB for more competition? If they don’t have direct source of revenue then how can they compete among themselves? We will discuss on it later…

गुरुवार, २६ जानेवारी, २०१७

Political stability… It does matter for economics also..

Now-a-day, we have strong political stability. But past was little bit unstable. India has witnessed POLITICAL DRAMA in 1980s and even in 1990s. We have experienced several wars also. These things are important not only for political and social conditions but also for economical situation. Let’s see. 
I have created a coding for political stability. In India, resignation of prime minister means abolition of council of minister and loksabha. So ideally P.M. should complete full five years. So suppose X person completed his full years as a P.M. then corresponding years would be coded as 1 (it means government was stable in these years.). Now suppose Y person couldn’t be there as P.M. for 5 years. He ruled (let’s say) only for 2 years then code for corresponding years would be 365*2/365*5 (365*5 are ideal days and 2*365 days were practically stable days.). For emergency, I have given -1 code. One might say that the dictatorship is the most stable (with compare to democracy) and that’s why emergency period should be coded as 1. But we are taking in the context of democracy and in the context of democracy, such kind of incidents are simple invalid. Now we have several wars. And wars have also an impact on government stability. We should consider it also. So suppose war is fought for 45 days then 45/365 (45 days are unstable days in given year.) would be subtracted from the corresponding year’s code. 

Fig 1 shows the whole picture of coding.

Fig 2 

Now observe the fig no. 2. The trends of stability and gdp growth rate (gdp growth rate/10 for simplicity) are very similar. Except 2008, graphs are very similar. We know that in 2008, there was a financial crisis therefore the given downfall was because of international fluctuation. Generally we connect political situation with FDI. But there are certain other undetermined factors through which such type of instability affects economy. 

Fig 3 

If we see fig 3, FDI is actually increasing but still there are fluctuations in growth rate. Fall and rise in growth rate during unstable and stable government is not actually because of FDI. It might be because of other factors like government expenditure, trust on government, trust on system and skeptical market. In next article, I will try to find out the reasons behind this relationship.

(Data sources – world bank - http://data.worldbank.org/) 
(Note – I have taken only major wars like Sino-India, Indo-Pak wars, Indian intervention in Sri Lanka. I have ignored the internal conflicts.).

शनिवार, २१ जानेवारी, २०१७

Inequality: run without your legs

कही है रोशनी 
तो कही है बस धुआ 
कही है छत शीशे का 
तो कही है आसमान खुला 

And that's inequality.
Yes, it’s true that the disparity between rich and poor people is continuously increasing.
Recently Oxfam announced the data related to the wealth hold by richest people. According to Oxfam, own 58% of total wealth in India is owned by richest 1%. But why this disparity is increasing continuously? And does it really matter? Let’s have a discussion.

First figure shows that the GDP (current US$) (in billion), per capita GDP, government spending and tax revenue is increasing with similar trend. It means tax revenue and government spending (total) is increasing continuously and it's reflecting in the growth of GDP. As GINI coefficient for each year is not available, I am just using the share of top 1% richest people in GDP. We can draw a rough diagram of inequality.

Second diagram is showing that the income share of top 1% richest people is increasing after 1990. But is it serious? If there is economic growth, then it is obvious. Problems takes very serious and dangerous face when there is no growth in the income of certain people. It the income of certain group of people is stagnated, then the economic growth itself becomes a reason behind the increase in inequality.

Third figure clears all doubts. The value added in service sector is rapidly raising while it's rapidly decreasing in agricultural sector. As service sector is a labor intensive sector, the return on capital is very high. That's means owners (very few) of limited sectors are getting high returns while majority of people are getting very low return as they are highly dependent on agricultural sector. That means the growth which we have seen is not equitable.

Now last diagram is interesting. More complicated analysis of given figure is required. But two things are showing consistency i.e rate of government spending and rate of income share of top 1% people. They have clear opposite nature. When rate of government spending is high, the rate of income share of top 1% is very low and vice versa. Government spending can be a weapon to tackle the problem of inequality. As one sector has high growth and another has low, there must be balance. And it does matter. As there is disparity, we are seeing the outflow of worker from one sector to another. But the sector which has high returns is not able to absorb the excess labor supply. And that's why informal sector with problems related to health, crimes, unemployment are increasing. Market is there for efficient return but for fair and equitable return government should intervene. Rather than encouraging the sector which has already grown up for more economic growth, government has to focus more on the benefit transfer programs like skill, health, credit supply (specially for a sector which has low return)

(data sources - world bank, https://datahub.io/dataset/world-top-incomes-database/resource/1a3b85d0-1076-4dd1-b762-f6e99201fa15