Home >Opinion >Solutions beyond farm loan waivers

In 2004, Atal Bihari Vajpayee’s electoral march to victory was stopped cold by his government’s failure to adequately recognize and address the problems of the rural economy. His heir, Prime Minister Narendra Modi, seems to have unfortunately learnt only half a lesson from that. Farmer distress is a real and pressing problem, as evidenced by the protests currently taking place in various parts of the country. But by announcing a farm loan waiver on the Uttar Pradesh campaign trail, Modi took the easy way out—and left the real problems unaddressed.

The numbers go some way towards explaining farmer resentment. Consumer price inflation in May dropped to a low of 2.18%, while food price inflation slipped into negative territory. At the index level, vegetable prices fell by 13.44% and inflation in pulses was at (-) 19.45%. After two successive years of below par rainfall, production shot up in the last financial year on the back of a normal monsoon and has resulted in a steep decline in prices. The production of tur, for example, is estimated to have gone up by about 80% in 2016-17. Similarly, higher production of vegetables has resulted in a price crash in the wholesale market. Prices have also been affected by demonetisation.

Little wonder farmers have taken up the UP precedent. Last week, a reluctant Devendra Fadnavis government in Maharashtra was compelled to announce a total farm loan waiver. The government had earlier decided to give a loan waiver only to marginal farmers that was estimated to cost around Rs30,500 crore. Similar demands are being raised in other states. For instance, Punjab has been asking the Central government to intervene. Union finance minister Arun Jaitley has said on more than one occasion that states going for loan waivers will have to raise resources on their own for such a scheme—but the damage has been done.

Loan waivers might help the government buy peace with farmers in the short run, but they are unlikely to change much on the ground. As we have highlighted in this space before, research shows that loan waivers do not result in greater investment or better labour market outcomes. In a column published in these pages in May (“The Hazards Of Farm Loan Waivers", 24 May), Tanika Chakraborty and Aarti Gupta, who studied the implementation of a previous farm loan waiver in Uttar Pradesh, noted: “Given that households in the same district face similar agricultural shocks, no improvement in farm productivity for households qualifying for loan waiver indicates a failure of the programme to achieve its desired goals."

Loan waivers can also affect the flow of credit as bank lending tends to move away from areas with greater exposure to such schemes. It creates distortions in the credit market, as repeated waivers incentivise default, which can affect the flow of credit to the sector in the medium to long run. Moreover, loan waivers have fiscal costs. They can not only increase the deficit and interest burden, but also limit the ability of the government to undertake capital expenditure. Lower capital expenditure affects longer-term growth prospects, including that of the agriculture sector.

Addressing the problems in the agriculture sector means solutions that go beyond loan waivers. One of Indian economic policy’s original sins is that over the years it has not been able to incentivise people to move out of agriculture because of lower than desired expansion in the manufacturing sector. Agriculture currently contributes just about 15% to the national output and about 50% of the population directly or indirectly depends on it for employment. This is unsustainable.

Compounding this are a number of issues in the sector today that require policy attention. For instance, in response to the changing demand pattern, farmers have diversified into producing more fruits and vegetables. Consequently, for the last five years, horticulture production has exceeded the production of foodgrains. However, accompanying infrastructure for storage and marketing has not developed, resulting in higher price volatility.

A paper brought out by NITI Aayog in December 2015 made several suggestions that are worth considering. Apart from efforts to increase yields, the framework for land leasing can be strengthened, which will not only allow consolidation, but will also give an opportunity to unwilling farmers to exit the sector. It also highlighted the idea of price deficiency payment. If the price of a crop falls below a predetermined threshold level, farmers can be compensated through cash transfers. Adequate safeguards need to be built in order to protect farmers against both production and price risks. Cooperatives can also be encouraged; these will help reduce risk and transaction costs.

Central and state governments will need to work together in order to enhance the viability of the sector. This will require investment in practically every aspect of the farm economy, including irrigation, agricultural research, storage and marketing. It will also require policy decisions in other areas—foreign direct investment in multi-brand retail, which would lay the groundwork for cold- chain storage infrastructure—that support the sector.

In the absence of this long-term planning and vision, the stress in the sector will keep resurfacing. And that means the same protests, the same debates and the same fiscally deleterious government responses a few years down the road.

What should the government do to address problems in the farm sector? Tell us at

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