The Modi government has worked out a relief package for farmers including interest-free farm loans and premium-free crop insurance ahead of its interim Budget to be tabled on February 1, informed sources say.

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"The government has planned to waive the interest on farm loans and the premium on crop insurance with the burden to be shared equally between the Centre and the states," two sources close to the development told IANS.

The government, which may announce the package either in the form of a Cabinet decision or in its interim Budget, is seriously trying to address the farm distress which it feels was the reason behind the BJP getting defeated in recent state elections.

Minister without portfolio Arun Jaitley, who was handling Finance ministry before going to the US for medical treatment, had clearly stated that the interim Budget may go beyond the traditional vote on account as tackling agricultural challenges "can`t afford to wait". 

The government is also considering cash handout to farmers through Direct Benefit Transfer (DBT) by subsuming the various subsidies given to the farmers on seeds, fertilizers, farm equipment, various government schemes and power.

"Minimum support price (MSP) has failed to benefit most farmers as many find it difficult to get the MSP price for their small quantity. The Centre is also considering a scheme similar to in Telangana, Odisha and Jharkhand," said a source.

Rhythu Bandhu scheme in Telangana, Mukhyamantri Krishi Ashirvaad Yojna in Jharkhand and Krushak Assistance for Livelihood and Income Augmentation (Kalia) in Odihsa offer a lumpsum amount to small and marginal farmers for farming.

"If the government combines all the subsidies and gives a top-up on that, then all the best. Fertilizer subsidy alone is for Rs 70,000 crore. They can give the money directly into the farmers` accounts," agriculture economist Ashok Gulati said.

The Centre gives subsidy on fertilizer, crop insurance and some credit subvention scheme. Gulati said the Centre can make the interest rate zero.

The farmers have been facing the brunt of falling crop prices which Jaitley recently said was due to increasing productivity in the farm sector. He said the sector had entered a "surplus era", management of which has become a challenge.

Being an election year, the government is far more concerned about the distress as it directly impacts about half the country`s population that is engaged in farming and 87 per cent of which are small and marginal farmers owning up to 5 acres of land.

While the government may be interested in reaping quick political dividends, experts feel the main cause of farm distress is due to consumer bias that the government has followed over the decades.

"To solve the main cause of distress, agricultural marketing reforms are required. The entire issue has to change from consumer bias to producer bias now. It can be done in the medium term, in a period of 2 to 3 years," Gulati said. 

He suggested removing the Essential Commodities Act and inviting private sector that would hold the stocks and create the value chain.

"The government gives Rs 169,000 crore of food subsidy to consumers each year. You give wheat at Rs 2 a kg which costs Rs 25 a kg and give rice at Rs 3 which costs Rs 33. And, you are doling it out to 67 per cent population," he said.

Instead, the government should limit the subsidised food grains to 40 per cent of the population and save Rs 40,000 crore to Rs 50,000 crore which then can be given to the farmers.