• Pulses
  • Dharmakirti Joshi
  • Agriculture
  • CRISIL Research
  • D K Joshi
  • Monsoon
October 03, 2017

Normal rains, little gains

Falling profitability continues to distress farmers
 

Monsoon was bountiful in 2017, allaying initial fears of an El Nino effect coming into play. While the Indian Meteorological Department (IMD) had forecast 2% deficiency (or rains at 98% of the long period average) for the southwest monsoon (July to September 2017) at an all-India level, the actual deficiency was 5%, compared with 3% in 2016 – but still normal.

 

However, distribution has been uneven with excess rains in some parts and severe shortage in others.

 

At an aggregate level, three agriculturally important states – Tamil Nadu, Gujarat and Andhra Pradesh – recorded excess rains causing floods or flood-like situations. The deficient zones in Maharashtra and Karnataka received rains by August, but pockets of stress remained. And as the season draws to a close, Uttar Pradesh, Haryana, Punjab and Madhya Pradesh are showing high deficiency at 19% or more.

 

To understand the impact of such uneven rains on agricultural output and incomes, we looked at the regional rainfall and crop production dynamics; profitability trends across crops to assess farm distress; and, possible implications of loan waivers announced to alleviate the distress.

 

There were three key takeaways:

 

First, despite, pockets of stress, kharif production is expected to be healthy (on its long term trend). Regions that witnessed weak rains either enjoy a strong irrigation cover or are those that contribute less to kharif production. Compared with last year, sowing as of September 29, 2017, was lower for foodgrains and oilseeds. The government’s first advance estimates suggest kharif production could be 2.8% lower on-year for foodgrains and as much as 7.7% lower for oilseeds.

 

But the decline is also because last year had seen a sharp increase in both, the sowing area and production of most crops. Compared with the normal or typical average for the period, sowing is higher and production as per trend this year.

 

Second, the flipside to good monsoon and bumper crop of last year is that prices for most foodgrains have fallen and consequently reduced farmer profits. For pulses and oilseeds, prices fell even below their minimum support prices (MSPs) and cost of cultivation, resulting in a loss on the margins. For several crops, prices and profit margins have continued to decline in recent months.

 

Many states are trying to assuage distressed farmers by announcing loan waivers. However, this would increase the pressure on the already-stretched fiscal deficits of these states. Farm loan waivers are, therefore, a paradox in a year of normal monsoon.

 

We estimate that if other states also announce loan waiver schemes the way Uttar Pradesh, Maharashtra, Karnataka, and Punjab did, the collective cost to the exchequer would be ~Rs 2.5 lakh crore – or 0.5% of GDP – per year, assuming the waiver gets equally staggered over three years. The cost could be significantly high for Tamil Nadu, which has the highest outstanding agricultural loans among states. Kerala, Madhya Pradesh and Rajasthan, too, could feel some pressure.

 

Farm incomes remain stressed, given the volatility in prices and declining realisations. Another recent study by CRISIL titled Pulses & Rhythms, which focusses on pulses price cycles, discussed the importance of price smoothening or stabilising techniques as an option to reduce shocks, which eventually erode the profitability of growers.

 

Stabilisation measures should be a mix of government intervention and market-based mechanisms to protect against price risks.

 

To sum up, the pain points for farmers are all too visible. Unless alleviation measures are planned and implemented carefully, and soon, there could be a gaping hole in the exchequer as well.