Recently, drought-hit Tamil Nadu farmers, who have been protesting in the national capital, decided to put off their stir till May 25, after the CM, Mr. Palaniswami promised to take up their demands with the Prime Minister. The farmers have been demanding a Rs 40,000 crore drought relief package, farm loan waiver and setting up of the Cauvery Management Board by the Centre.The scenario seems all too familiar, repeating every year, involving farmers across different States-failed crop, loan default and farmer distress. Disturbingly, farmer suicides saw a spike of 41.7 per cent (8,007 deaths in 20015) up from (5,650 suicides in 2014) according to NCRB data. As always in the past, we will react. Some announcements, relief packages and witch hunting fall guys (moneylenders) will follow and the cycle will repeat itself again, every year. So, what do we do differently? The solution lies in treating land as financial assets. Let us elaborate.
If a corporate enterprise can raise capital based on the assets they possess and the promise to sell the goods they produce, why can’t a farmer do the same? The answer is simple. An enterprise can raise funds because the individuals who buy into their plans today, calculate their potential gains as well as the exit options well. In other words, if the company is unable to deliver, they will find other buyers of the stock and limit their losses. For this, it is important that the trading is frequent, that is both-the market as well as the stock is liquid. This can only happen if the information is updated frequently, after all one must exit as soon as things start getting bad and not wait till the financial asset is worthless! Therefore, one can think of land as a financial asset only if we have a mechanism that can dynamically update the asset quality (land) and the potential sell (yield). We could not do it so far, because the transactions involving land were far too infrequent and often under extra ordinary circumstances implying that such transactions (if any) does lead to price discovery. The illiquidity is mainly because such lands are put to the same use thereby reducing the scope for substantial value addition post transaction. This implies that the buyer of the land does not value it too highly than the seller of the land thus keeping the current market price low. Further, the predominant form of land transaction in rural India is through “distress sale” (owing to financial or other shocks) which dampens the land price. To make matter worse, to save stamp duties, the circle rate is often artificially kept low. It is time we look agriculture as an ongoing concern and using Big Data Analytics (BDA) will help us get there.
In a separate piece published earlier, we had argued how Big Data Analytics (BDA) has the potential to transform the way agriculture is conducted in India. Using real time satellite images and BDA, the access to credit problem can be solved largely. However, solving the credit access is mostly a one-time exercise, usually employed before the cropping season. The BDA architecture meanwhile would generate and maintain a data repository of all plots with dynamic updating of values. This is sufficient for trading in the market. Simply put, one can divide each plot as multiples of one square meters (say) where each such smaller units are now akin to ‘shares’. A landowner who owns 1 acre of land starts with 4045 shares in his enterprise. To prevent future ‘takeovers’, these shares need not have voting rights. The farmer can now raise capital from the market by offering these shares as IPOs. Trading of these shares, guaranteed by an exchange, is now feasible as regular information about the likely potential yield is available through BDA. Very soon, this ‘land market’ will have the same price discovery mechanisms that are present with other financial instruments. What will such a change achieve? One, these assets will have real time market values, which can be now traded in the market. This will allow landowners to not only get better credit facilities but also raise equity capitals. Two, any transaction that involves selling such plots or tendering in the event of land acquisition will be based on much more accurate valuation. Three, over 15 Crore landless agricultural labors, who gets hit the hardest during bad times, will now have a chance to own assets.
The good news is that decisions based on BDA are already taking place. Indeed, Financial Institutions are using such insights to price and structure credits to agriculture. We need to integrate agriculture in the BDA platform. Meanwhile, the policy makers can start developing an exchange and the appropriate regulations that will make the market functional. To mitigate risk, one must simultaneously think f the instruments and the market for it. Tackling the vagaries of agriculture requires fresh ideas and approach, we need to encourage that.