The politics and economics of farm loan waivers

Farm loan waivers are a bad idea. They were a bad idea in 2008 when the UPA was in power, and continue to be so in 2017 with the NDA in power


Politically, a farm loan waiver makes eminent sense with the Lok Sabha elections not too far away. Economically, though, it is difficult to make a case for loan waivers—simply because there is no case to be made. Photo: HT
Politically, a farm loan waiver makes eminent sense with the Lok Sabha elections not too far away. Economically, though, it is difficult to make a case for loan waivers—simply because there is no case to be made. Photo: HT

Several parts of India are in the grip of an agrarian crisis.

In part, this is because of the cumulative effect of bad monsoons. Farmers in many parts of India are still dependent on the annual rains which were deficient (by double digit rates) in both 2014 and 2015; 2016 was a good year, though.

Commodity cycles that cause global food prices to go up and down cyclically are also responsible for this. According to the Food and Agriculture Organization (FAO), at the end of 2016, food prices were roughly at the same level they were in 2006 (they witnessed a huge spike in the intervening decade).

In India, agriculture remains highly regulated, with inadequate linkages to markets, and opaque and unscientific pricing. And farmers lack access to and expertise in risk management tools and techniques that can help them deal with the vagaries of nature and market shocks. Mint’s columnist Himanshu (he uses only one name), one of the country’s leading agricultural economists, has previously written on how the long decay of Indian agriculture has forced once dominant and prosperous agricultural communities such as the Jats and the Patels to launch agitations seeking reservations in government jobs.

Unhappy farmers worry politicians. 

The National Democratic Alliance (NDA) government that ran India between 1999 and 2004 suffered a shock defeat in the 2004 parliamentary elections because of the lingering effects of the 2002 drought (India received only 80% of the rainfall it usually does during the south-west monsoon that year).

And populist moves directed at farmers usually result in substantial political dividends. The United Progressive Alliance (UPA) surprised itself and everyone else by returning to power in the 2009 parliamentary elections, largely on the back of a Rs70,000 crore farm-loan waiver it announced in 2008. That waiver, and the Mahatma Gandhi National Rural Employment Guarantee Scheme—a job guarantee programme that promised 100 days of employment a year to at least one adult from every poor rural household—helped India through the 2008 financial crisis. The rural economy continued to shine in that period, and a broader fiscal stimulus (including lower indirect taxes on some products) meant that the Indian economy saw a sharp V-shaped recovery.

The growing chorus for a waiver of agricultural loans in Maharashtra—another once-prosperous agricultural community, the Marathas, has also been agitating for subsidies for students and job quotas—and the recent waivers of such loans announced in Tamil Nadu (around Rs8,000 crore) and Uttar Pradesh (around Rs37,000 crore) need to be seen in this context.

Apart from being an effective political weapon, waivers promise instant relief to farmers. But they punish farmers who have been diligent with repayments and encourage all sorts of wrong behaviour—lax credit discipline and the use of borrowed funds for non-agricultural purposes.

Mint’s house view is that loan waivers are a bad idea. They were a bad idea in 2008. And they are a bad idea in 2017.

The current NDA government is, like almost all ruling dispensations that preceded it, centrist (and leans towards the left). Before it came to power in 2014, there were some who believed that it would be more rightist (in economic policies). This belief wasn’t entirely out of place. The third edition of the NDA that ran India between 1999 and 2004 (before it, the first had run the country for 13 days and the second for 13 months) was a progressive, right-leaning government. Since 2014 though, there has been enough evidence to suggest that in terms of broader economic agenda, the current government is no different from the one that came before it, albeit minus the corruption and the ad-hocism. 

Politically, it makes eminent sense to announce a farm loan waiver now, in 2017. The next parliamentary elections are in 2019, not too far away. From a humanitarian perspective too, it is difficult to ignore the suffering of farmers. 

Economically, though, it is difficult to make a case for loan waivers—simply because there is no case to be made. Some pundits have equated these with some corporate debt restructuring exercises, but the solution to sweetheart debt restructuring deals that banks get into with companies—the country’s largest bank, State Bank of India, entered into one with Kingfisher Airlines in 2012—lies in prevention, not in compensating by offering similar sweetheart deals to farmers.

At another level, the solution to the agrarian crisis is better risk management and more efficient agricultural markets.

Sure, the current government has the right ideas; it has launched a new crop insurance scheme and also sought to create a National Agricultural Market, but as Mint has previously reported, the first is still skewed towards protecting banks that provide agricultural loans than farmers, and the second is still in its infancy. Just around one in four farmers has protection, and the various national agricultural markets are yet to be linked (which means all trading happens within each, and not across), and powerful trader lobbies have ensured that important commodities (so-called bulk ones) do not get traded on them. Still, with some tweaking, both could provide at least a partial answer to the ongoing agrarian crisis.

That must be done. Loan waivers are great palliatives, but can’t tackle the underlying problems. 

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