In News:

• State governments should resist giving farm loan waivers since they will create fiscal stress and not reach the farmers that need them, former RBI Governor Raghuram Rajan said

Explained:

• It often goes to the best connected rather than to the poorest. It also creates enormous problems for the fiscal of the State once the waivers are done.”
• These comments assume significance at a time when speculation is increasing about a possible farm loan waiver from the Centre similar to those given by some State governments.
• “Government imposed credit targets are often achieved by abandoning appropriate due diligence, creating the environment for future NPAs,”
• Loan waivers, as the RBI has repeatedly argued, vitiate the credit culture and stress the budgets of the waiving State or Central government. They are poorly targeted, and eventually reduce the flow of credit.

Highlights of the “An economic strategy for India” report:

• The economists reportedly noted that the non-bank financial sector needs a strong banking system as well as deep equity and bond markets, supported by liquid secondary markets and a robust regulatory and legal infrastructure.
• Stressing on the importance to maintain macroeconomic stability, the economists suggested sticking to fiscal consolidation – working to reduce the consolidated fiscal deficit to 5% and general government debt to 60% of gross domestic product – and finding ways to ensure that off-balance sheet liabilities don’t build up.
• They also suggested the formulation of a “grand bargain” between the centre and the states, giving the latter incentives to be aligned with the government’s fiscal goals – something that is almost entirely missing currently.
• Enhancing liquidity in the government debt market and making it more attractive to institutional and retail investors.
• Developing missing (or nascent) markets like fixed income derivatives to hedge the credit and interest rate risk of fixed income securities.
• Developing a liquid and deep corporate bond market through policies to encourage institutional investor participation.

Macroeconomic stability: A prerequisite to sustainable growth and job creation:

• India’s economic history is replete with the same lesson: preserving and protecting macroeconomic stability is an essential prerequisite to strong and sustained growth.
• Every time macro stability has been traded off to boost growth, the economy has been pushed towards a crisis, the consequences of which have undermined the very growth that was the initial policy focus.

  Ensuring macroeconomic stability has at least three elements to it:

  • Maintaining low and stable inflation,
  • Ensuring the consolidated fiscal deficit leaves enough space for private investment, and
  • Ensuring that the current account deficit is sustainable
• It can be financed largely through stable capital inflows, to help insulate the economy from sudden swings in global sentiment.
• High and variable inflation constitutes a regressive tax, with the poor bearing the biggest brunt, since their incomes are typically least indexed to inflation. It also dissuades foreign investors from investing in rupee assets.
• Similarly, large and unsustainable fiscal/external imbalances impart significant macroeconomic and financial market uncertainty, push up borrowing costs and risk premia in the economy and threaten financial stability. All this impedesprivate and public investment.

Agriculture & the rural economy:

• We need deep rooted transformation of agriculture, treating it not as a sector that has to be propped up through repeated sops, but as an engine of India’s job creation and growth. For that, it is imperative that we thoroughly reform agricultural and land policies. In particular, a key source of agrarian distress in recent years has been that the terms-of-trade confronting farmer has turned progressively more adverse, partly as a result of policies to combat food inflation. While low inflation is desirable in itself, the impact on farmers also needs to be taken into account. A policy priority should be to reduce distortions in farm product prices as well as input prices. Another important enabler is technology, both in educating and informing farmers, as well as in opening access to markets. Some specific proposals include
• Increase investment in research – covering new seeds including genetically modified (GM) ones, latest farming and irrigation techniques and disseminate new techniques widely, including through digital means. Invest in infrastructure such as irrigation, roads, and improved transport and storage logistics. Eschew loan waivers that divert resources from needed investment.
• Ensure that farmers receive more of what is paid by the consumer by
  • Improving farmer access to domestic and international markets by reducing fees, restrictions on competition and building the necessary infrastructure.
  • Foregoing frequent closing or opening of access to international markets
• Facilitate farming at scale for relevant crops
• Through the creation of farmer/producer cooperatives,
• By enabling easier long-term leasing of land, for which land titling is an important prerequisite.
• Move to a fixed cash subsidy per acre cultivated based on digitizing and identifying plots (as demonstrated successfully by the RythuBandhu Scheme of the Govt. of Telangana)
• Replace price support schemes that are costly (because of corruption and inefficiencies in procurement and storage), ineffective (because procurement is not widespread, especially when and where most needed), and distortionary (because the wrong crops are incentivized).
• Improve and expand the current Pradhan Mantri FasalBima Yojana (PMFBY), especially as the climate gets more volatile.
• Here quick assessment of crop damage using new technologies such as satellite images and drones, as well as quick payout into bank accounts, will enhance adoption.
• For landless laborers, the best short-term policy option is likely to be to strengthen the National Rural Employment Guarantee Scheme. Evidence suggests places with well-implemented NREGS schemes have significantly higher market wages – without hurting employment. Thus, increasing allocations to, and ensuring better implementation of, NREGS may be the best immediate policy option to protect the landless rural poor.
  • Efficiency of NREGS spending can be increased by working with line departments to improve asset quality and create better quality rural infrastructure.
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