Loan waivers are no solution

Loan waivers are no solution
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First Published: Mon, Feb 18 2008. 11 55 PM IST

Updated: Mon, Feb 18 2008. 11 55 PM IST
There is little debate that Indian agriculture requires a “big push” to be revived. Waiving outstanding debt is surely not the answer. Yet, the huge farm-loan relief package, reported in Mint on Monday, is all that the Centre can come up with.
The loan waiver approach would be beset with problems from the word go. To begin with, there are serious adverse selection problems whereby loans incurred by those farmers who can pay can’t be distinguished from those who cannot. Once the waiver is made effective, the chance to recover money from better off farmers will be lost.
Then, there is the size of write-off and its source of funding. Ballpark figures range from Rs32,000 crore to Rs90,000 crore. The upper limit is around 2% of the country’s gross domestic product. In the context of limits to deficits imposed by the Fiscal Responsibility and Budget Management (FRBM) Act, it’s not clear how the government will source this kind of money without jeopardizing FRBM targets.
Opposition for these reasons is procedural; it’s concerned with the “how” of the process and does not address its “why”. It’s when the latter is raised that the edifice crumbles. Consider the following question: What would help agriculture more—a Rs90,000 crore injection of public investment in irrigation, better inputs such as seeds and marketing support or a one-time loan waiver with little money left for public investment?
The answer is obvious both to economists and politicians. Yet, the political system is incapable of implementing the right solution. With elections on the horizon, the temptation to make a political killing is irresistible. It matters little if the problem remains unsolved in the bargain.
Indebtedness is a problem that confronts all farmers in India, but is most acute among small and marginal ones. In their case, the problem has features that are difficult to solve. Most such farmers have landholdings below the threshold that is economically viable. The result is the cyclical appearance of bad loans and poor rainfall. Loan waivers have little to do with ending the conditions that lead to such problems.
In a sense, it’s also a story of unfinished reforms in India. The question should be why almost 55% of the population is producing only 17% of the output. Unless this huge swathe of the population is empowered, loan waivers will remain a constant feature of the landscape.
Will loan waivers spur the agriculture sector? Write to us at views@livemint.com
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First Published: Mon, Feb 18 2008. 11 55 PM IST