Modi courts India’s farmers with higher prices

Smoking a large hookah in his village outside Delhi, Surander Singh glances anxiously at the overcast sky, hoping rain will pour down on his three acres of newly sown rice paddy. India’s monsoon, on which 90m farming families depend, has started well nationally but rains have been scarce so far in his corner of Uttar Pradesh.

With 1.5 acres left to sow, Mr Singh must soon decide whether to plant more rice paddy — which needs ample water — or millet, which fares better in drier conditions. It’s a tough call. “If it rains too much, the millet will get destroyed,” he said. 

Such difficult choices have long been the lot of India’s farmers, along with shrinking landholdings, rising production costs, low productivity and sudden, sharp price fluctuations. But in recent months, mounting discontent has boiled over into dramatic — and sometimes violent — protests. 

Now, as Prime Minister Narendra Modi gears up for a tough re-election battle next year, he is moving to shore up his flagging support among this large constituency. After a series of state-level farm loan waivers, New Delhi this month sharply increased the price it will pay for crops it purchases for the country’s public food distribution programme during the next harvest. 

While the amount of the increase in the government’s “minimum support price” (MSP) policy varies from crop to crop, Goldman Sachs says the overall price increase is about 15 per cent — the highest annual rise in six years. 

Mr Modi says the move — expected to cost the exchequer at least an additional $1.6bn over last year if the volume of crops procured remains at last year’s levels — reflects his commitment to “the welfare of farmers”. But economists warn India will pay a high price for the government’s pre-election munificence: accelerated inflation and uncompetitive agricultural exports, further pressuring a merchandise trade deficit, which hit a five-year high of $16.6bn in June. 

“It is the triumph of populism over good economics,” Vivek Dehejia, senior fellow at Mumbai’s IDFC Institute, a think-tank, said of the price increase. “The objective is to shore up support among the farming community, where Mr Modi and the BJP government are seen to be vulnerable. But it does nothing to solve the underlying problem, which is that there are far too many people doing inefficient, low-productivity agriculture.” 

Rather than being delighted, farmers’ organisations have been dismissive, pointing out that the price increases will benefit just the small minority of farmers who are able to sell their crops to the government. 

“It’s a very significant hike but it will not translate into political benefits,” said Ajay Vir Jakhar, chairman of Punjab State Farmers’ Commission. “Less than 10 per cent of farmers are going to benefit from it. But you will raise the expectations of another 50 per cent. It’s a political stunt, which will backfire.” 

India has long tried to juggle its twin — and essentially contradictory — goals of keeping food cheap for the urban masses, while shoring up farmers’ incomes. New Delhi’s main tools for this balancing act are export restrictions, import tariffs and its vast subsidised food programme — for which it procures millions of tons of grains, oilseeds and pulses at preset prices each year. 

Only about 7 per cent to 10 per cent of farmers can sell to the government, whose warehouses are already overflowing with surplus grains. Nevertheless, the MSP has an outsized effect on the wider economy. 

In 2009, the government, then led by the Congress party, raised the MSP more than 35 per cent, which some economists blamed for unleashing rapid inflation. While MSP increases moderated after that, they were raised more than 20 per cent for the fall 2013 harvest — ahead of India’s previous national elections. 

Until now, Mr Modi’s government has been relatively conservative in raising the MSP, which some credit with helping rein in once rampant inflation. Last year’s average increase was just 6 per cent. 

But with elections just around the corner, the government, which has pledged to double farmers’ incomes by 2022, has now yielded to political pressure for a more generous payout. 

Besides paying more for commodities, New Delhi has also indicated that it will buy a greater quantity of grains — or compensate farmers unable to sell their crops to the state purchasing agents. 

While details remain hazy — especially given the lack of storage capacity for increased grain purchases — economists are forecasting that the government largesse will add another 30 basis points to 70 bps (0.3-0.7 percentage points) to inflation. It will also threaten New Delhi’s fiscal deficit target of 3.5 per cent of GDP. 

Back in his village of Sunpura, Mr Singh thinks there is little chance that he’ll see any pre-election windfall, given his past efforts to sell his crops to the government. “All these big announcements the government makes,” he said, “don’t mean much for the people on the ground.” 

Additional reporting by Jyotsna Singh