Opinion: For the Indian farmer, Santa Claus came early this year4 min read . Updated: 25 Dec 2018, 09:09 AM IST
Loan waivers only provide some relief while postponing the resolution of real problem
Santa Claus came early this year with Congress promising the waiver of farm loans worth ₹ 62,000 crore in the states where it won assembly elections recently. This is just like last year when the Bharatiya Janata Party (BJP) donned the Santa costume in Uttar Pradesh and Maharashtra. The Indian farmer is akin to a neglected child with abusive parents who play Santa once a year for a photo op.
Santa never brings essentials like vaccines, school fees, vitamins or books. Santa only brings little trinkets and treats. The plight of farmers is similar—loan waivers will neither increase farmer productivity nor help them escape poverty; it only provides some immediate relief while postponing the resolution of the real problem. The way Santa rewards good kids, political parties are rewarding constituents. And the hardworking elves for this gift are none other than taxpayers.
There are many problems with loan waivers, but the most important is that they cannot fix the cause of the agricultural crisis. In my last column in this space on 11 December, I detailed the six regulatory shackles keeping farmers in poverty. First, farmers are denied access to regional and global markets and, therefore, better prices because they are restricted to selling to specific mandis operated by licensed middlemen. Second, the government promises artificially high minimum support prices, incentivizing farmers to increase production, and then fails to deliver those prices, forcing farmers to dump their produce at throwaway prices. Third, farmers are not allowed to sell their land to non-farmers or easily convert their land to non-farm use, which denies the exit option for low-productivity farmers. Fourth, poor land titling systems increase uncertainty depressing land markets and prices. Five, markets for agricultural inputs are severely controlled, which leads to a culture of freebies and input subsidies. And six, the ban on importing the latest agricultural technology is depressing agricultural productivity and innovation. These policies are the real cause of the agrarian crisis of poverty—and providing loan waivers does not resolve even one of them. Loan waivers are a band aid trying to mask a case of terminal cancer.
Instead, loan waivers create perverse incentives and many unintended consequences. Expecting loan waivers, farm loans defaults and non-performing assets (NPAs) begin to rise, and the more farmers who default their loans, the more likely they are to be forgiven. The benefits from waivers are also usually captured by richer farmers. And since agricultural loan growth has been very slow because of NPAs and defaults, the truly marginalized farmer is pushed into the hands of local moneylenders charging high interest rates. The biggest problem of course is that loan waivers are disastrous for the fiscal health of state governments, and given the scale of the new waiver promises, even the Union government. With rising deficits and lagging growth, there are fears of some long-term fiscal consequences.
These reasons have prompted Raghuram Rajan to approach the Election Commission to take farm waivers off party manifestos and election promises—a problematic quick-fix. To begin with, all freebies given by governments are not referenced in manifestos and there are plenty of ways to remove loan waivers from manifestos while executing them once the government is formed. Second, this is a severe restriction on free speech in a democracy. And third, it would set a terrible precedent. If promising loan waivers is off the table, can communist technocrats lobby the Election Commission to take economic liberalization off manifesto promises in the future? This is a technocratic solution that attempts to eliminate a symptom relief. If doctors are providing band aids to cure cancer, this is an attempt to ban band aids.
In addition to approaching the Election Commission, Rajan has detailed the urgent reforms required in India in a report titled An Economic Strategy For India, (co-authored with Abhijit Banerjee, Pranjul Bhandari, Sajjid Chinoy, Maitreesh Ghatak, Gita Gopinath, Amartya Lahiri, Neelkanth Mishra, Prachi Mishra, Karthik Muralidharan, Rohini Pande, Eswar Prasad and E. Somanathan) released on 14 December . Discussing the agricultural crisis in some detail, the all-star economist team also advocates liberalizing agricultural markets, agricultural land markets, reducing regulatory barriers, expanding access to agricultural credit and insurance markets, modernizing land titling systems, and allowing greater innovation and experimentation in agricultural technology, among others. These reforms are economically sensible and will lead to a long-term solution to agrarian crisis and growth. But they are far more difficult to execute and have few takers in the current political climate, where every party is in a race to the bottom to woo voters.
Without meaningful reform providing access to markets, farmers will face grave and recurring crises. And economists of all stripes have sent warning signals of the fiscal crisis because of loan waivers. But political and economic incentives will lead to more election pandering by politicians and competition for freebies instead of reforming agriculture, which means Santa will likely visit every year. Unfortunately, even though Santa came early, Indian farmers will not jingle all the way to the bank.
Shruti Rajagopalan is an assistant professor of economics at Purchase College, State University of New York