Rural, agriculture distress fact as it is hit by declining prices

By Arjun Deshpremi
New Delhi. The largest public sector lender State Bank of India (SBI) has said that Rural/Agriculture sector distress is a fact as it is hit by declining prices in recent years. In its research publication SBI Ecowrap, it has said that the Agri-GDP deflator has declined from 9.9 per cent in FY13 to merely 1.1 per cent in FY18. Such persistent decline in Agri-GDP deflator is indeed worrisome.

Ecowrap said that such a decline also coincides with the in principle inflation targeting regime introduced by RBI from FY14. “We also believe that buoyant tractor sales are in no way indicative of the health of the rural sector. Now tractors are being used more for transportation of building materials,” said SBI publication headed by Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

According to the paper, There are 3 ways to alleviate such a distress, each of which has a benefit and a cost. Firstly, a price support programme with the increment of MSP increased by 1.5 times across 17 major Kharif and Rabi crops could impact CPI inflation by 71 bps (pulses alone by 42 basis points, but cereals minimal). Secondly, for a price support scheme like Bhavantar Bhugtan Yojana (we believe it has been somehow unfairly criticized by sector experts) if applied at all India level, the total cost is around Rs 32,302 crores.

It added that Bank also believe that buoyant tractor sales are in no way indicative of the health of the rural sector. Now tractors are being used more for transportation of building materials.
Secondly, for a price support scheme like Bhavantar Bhugtan Yojana (we believe it has been somehow unfairly criticized by sector experts) if applied at all India level, the total cost is around Rs 32,302 crores. However, if states share around 40%, the cost will come down.
Thirdly, an income support scheme as introduced by Telangana State. Our estimate suggests, if this scheme is implemented at all India (29 States+ UT) level by providing Rs 4000 per acre per season, the financial burden could be around Rs 2.7 lakh crore
(based on net sown area) and could rise to Rs 3 lakh crore if offered on cultivated land. Any item to dilute the cost by removing cereals could jeopardize the production patterns.
Based on the analysis of all the three schemes (in which two of them are currently running in two states), we propose a hybrid of 2 schemes viz. 1.5x of MSP and Price Compensation Scheme.
This will involve an optimal inflation /fiscal cost trade-off and win-win for farmers.
For Cereals (Wheat, Paddy, Ragi, Maize, Bajra) which are largely procured by both Central and State Government, implement MSP of 1.5x cost of production. Crops like Groundnut, Sesamum, Nigerseed and Soyabean should also be covered under 1.5 times
of MSP. The overall impact of inflation could be only around 17 basis points for such crops.
For Pulses (Arhar, Moong, Urad, Masur and Gram) and Sunflower Seed, we propose Price Compensation Scheme (PCS) as the fiscal cost will be Rs 13,110 crore only/ 0.08% of GDP.

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