Loan waiver is not the solution to farm crisis

While farm loan waiver does yield political dividend, it causes systemic damage to the farm credit market and does nothing to end the debt traps five years from now


The demand for loan waivers has not only spread now to other states but will continue to remain the major way through which governments appease a section of farmers. Photo: HT
The demand for loan waivers has not only spread now to other states but will continue to remain the major way through which governments appease a section of farmers. Photo: HT

Among the first steps taken by the newly elected Bharatiya Janata Party (BJP) government led by Yogi Adityanath in Uttar Pradesh was a farm loan waiver. All loans of up to Rs1 lakh of small and marginal farmers would be waived. It also announced waiver of non-performing assets (NPA) worth Rs5,630 crore, benefitting 700,000 farmers. The loan waiver which is expected to cost the state government Rs36,359 crore will benefit 21 million farmers in total.

The demand for a loan waiver was raised first by Congress party during its padyatra in the run up to the state assembly elections and then picked up by almost all parties contesting the UP elections. The BJP, which opposed the previous loan waiver by the United Progressive Alliance (UPA) in 2009, was the last to join the bandwagon. It has now been followed by demands for similar loan waivers in other states with Maharashtra setting up a committee to consider such a proposal. Tamil Nadu has already announced a farm loan waiver with the Madras high court suggesting an extension of the loan waiver to include a larger set of farmers.

The demand for a loan waiver by the farmers is justified, given the distress in rural economy. A group of farmers from Tamil Nadu has been protesting in Delhi for weeks now with skulls of fellow farmers. Similar protests and agitations for farm loan waiver has been made in Karnataka, Madhya Pradesh and Rajasthan. While governments are happy to oblige the demands given the large constituency of farmers, particularly in states where elections are due, farm loan waivers are not the solution to the systemic issue of why farmers are falling in the debt trap time and again. Remember, the last loan waiver at national scale was less than a decade ago with the UPA government announcing a loan waiver of more than Rs70,000 crore.

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It is now well-known that the rural economy and the agricultural sector in particular have been in distress for quite some time now. The distress which started three years back worsened with two back-to-back droughts in 2014 and 2015. But the distress was also due to declining farm gate prices of a majority of crops since 2014. With rising input costs, this not only squeezed the profit margins, but the uncertainty of weather and price shocks meant that farmers had no option but to rely on moneylenders. Demonetisation may have yielded political dividends but nobody denies that it did affect the rural economy negatively, the extent of which may be known only later.

According to the Situation Assessment Survey (SAS) of 2012-13, 52% of all farmers in the country have debts outstanding, with an average debt of Rs47,000. The incidence was higher in southern states with 93% farmers indebted in Andhra Pradesh and 83% in Tamil Nadu. At the all India level, 60% of these loans were from institutional sources, while the remaining were accounted for by local money lenders and other sources. The data also shows that the extent of dependence on non-institutional sources was much higher for small and marginal farmers with more than 50% loans of these groups coming from non-institutional sources.

ALSO READ : Why Narendra Modi’s farm loan waiver promise in UP was bad politics too

With this extent of indebtedness and reported increase in suicides among farmers in distress, loan waivers appear as the easy solution to the problems of the farming sector. But it comes at a cost. First, it does increase the problem of moral hazard by penalising sincere and law abiding farmers. It gives rise to a tendency to default if the loan waivers are not a one-time solution but keep appearing every decade. It certainly leads to a deterioration in the performance of banks but also has an impact on credit off-take and repayments. It was the same approach of writing off loans of big corporate defaulters which has led to a situation of unprecedented NPAs in the banking system. But it also penalizes the small and marginal farmers who are more dependent on non-institutional sources of loan such as the local moneylender. The interest on these loans is higher but these are excluded from any loan waiver scheme.

Notwithstanding these problems, the loan waivers have been welcomed by every political party with demand for more of these in other states. The blame for this lies with the Union government but also previous governments. The last three years of neglect of the agricultural sector have only worsened the situation in agriculture with declining profitability and increased vulnerability. The option of providing farm loan waiver is like a Hobson’s choice. But even at this juncture, the waiver is a short-term relief for a critical patient. It does not help the farmers increase productivity or improve profitability. That’s why the real question is why our farmers are falling in debt and committing suicide. The answer to this also explains the approach of the governments which are eager to provide loan waivers but have contributed to declining investment in agriculture over the years.

ALSO READ : RBI governor Urjit Patel says farm loan waiver a ‘moral hazard’

For a government which has promised to double farm incomes in the next seven years, the strategy of reviving farm incomes does not go through farm loan waivers but through sustained investments in creating irrigation infrastructure, marketing, storage and warehousing infrastructure; and by removing the hold of large cartels and middlemen on the farm trade. Unfortunately, the approach of the government of relying on farm insurance helps a majority of those farmers who are also beneficiaries of institutional loans. The last two budgets have seen significant cuts in funding to agriculture. Some of the programmes such as Rashtriya Krishi Vikas Yojana (RKVY) and irrigation programmes which had shown results in terms of increasing productivity and profitability have seen large reductions in budgets. Even a fraction of the amount of loan waiver as investment in agriculture would have gone a long way to ensuring better incomes for farmers in the future.

Much like earlier years, short-term political expediency has given way to long- term solutions to the problems faced by the farming sector. The demand for loan waivers has not only spread now to other states but will continue to remain the major way through which governments appease a section of farmers. While such an approach does yield political dividend, it causes systemic damage to the farm credit market and does nothing to end the debt traps five years from now.

Himanshu is an associate professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.

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