Farm loan waivers are back in favour
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New Delhi: After a long hiatus, farm loan waivers are back in favour.
While the victorious Bharatiya Janata Party (BJP) in Uttar Pradesh and Uttarakhand and the Congress in Punjab have committed in their respective manifestos to write off loans of small and marginal farmers, the Maharashtra government, too, is under pressure to announce a similar package.
In fact, Nationalist Congress Party president Sharad Pawar met Prime Minister Narendra Modi in Delhi on Wednesday, demanding a debt-waiver. A year ago, immediately after she was elected chief minister of Tamil Nadu, J. Jayalalithaa had waived off loans of small and marginal farmers.
While parties do gain currency with farmers for the waiver, they will be under scrutiny of fiscal purists and rating agencies—not just for being fiscally imprudent and saddling banks with more bad debt, but also because it creates a moral hazard to wilfully default on debt repayments. At the same time, it is also a fact that Indian farming has been reeling under the impact of continued rural distress after two consecutive years of drought in 2014 and 2015 and the collapse of global commodity prices.
The states worst hit by the drought include Uttar Pradesh, Maharashtra, Karnataka, Punjab, Kerala and Haryana.
The last big farm loan waiver was in 2008 when the Congress-led United Progressive Alliance (UPA) announced a Rs60,000-crore debt waiver package for small and marginal farmers. Together with its rural employment guarantee scheme, the loan write-off helped ensure a second term for the UPA. While the loan write off in UP is estimated at around Rs20,000 crore, for Maharashtra it will be around Rs23,000 crore.
Experts argue loan write offs should only be initiated in exceptional circumstances. “There is a need to look at why the farming system has become unsustainable. It is also a disincentive to the banking system because people start expecting that loans would be waived off. It can only be a short-term solution but there is need to look at the problems ailing the agriculture sector,” said Himanshu, associate professor at Jawaharlal Nehru University, Delhi.
Indian agriculture, still dependent on the monsoon, has undergone a makeover and is no longer dominated by foodgrain production. Horticulture has emerged as a new focus area, but is vulnerable to weather and price volatility—raising the risks to farmers.
Nearly 54% of the crop area in India lacks assured irrigation and more than 70% of the annual rainfall is concentrated between June and September.
A monsoon deficit of 12% in 2014, together with unseasonal showers ahead of the winter harvest in 2015, led to a 4.7% drop in foodgrain production during 2014-15, compared with the previous year.
Kotak Mahindra in a recent note, pointed out that in recent years loan waivers have become a trend in the run-up to elections. “It creates unnecessary friction between lenders and borrowers. Waivers aimed at delinquent or non-delinquent borrowers increase the risk for lenders as repayment behaviour could potentially deteriorate ahead of elections. A regular phenomenon of waivers would eventually result in banks silently pulling back lending a few quarters ahead of elections or look to increase interest rates to compensate any risk, both of which do not lead to the best outcomes,” the note added.
Remya Nair and Prerna Kapoor in New Delhi and Abhiram Ghadyalpatil in Mumbai contributed to the story.