Uttar Pradesh’s farm loan waiver: Neither egalitarian nor productive

Fulfilling his poll promise, chief minister Yogi Adityanath has announced a farm loan waiver scheme in Uttar Pradesh. The scheme will cover small and marginal farmers with debts of up to Rs1 lakh and is expected to cost the state government Rs36,359 crore. How effective can the scheme be in tackling farmers’ woes in India’s largest state?

Including only small and marginal farmers in the loan waiver scheme is an attempt to ensure that only the most vulnerable benefit from this expensive move. However, there are two factors which undermine the progressive intent behind such policies. The poorest farmers often rely on non-institutional sources of credit due to lack of credit-worthiness and related factors. Even if the government wanted to, it cannot provide relief to those who have taken loans from non-institutional sources as anybody could queue up for relief due to the absence of a verifiable paper trail. Also, as is the case with any loan waiver, those who paid back their loans despite facing hardships would end up as losers.

The Uttar Pradesh government has decided to issue Kisan Rahat (farmers’ relief) bonds to pay for this move. Although the details of these arrangements are awaited, it would put significant pressure on the state government’s finances throughout its term, and probably even after that.

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Assuming an interest rate of 6.5-7.5%, the bonds would cost anywhere between Rs2,363.2 crore and Rs2,726.8 crore in annual interest payouts. According to the latest Reserve Bank of India study of state budgets, Uttar Pradesh’s capital expenditure on agriculture and allied activities and rural development (economic services category) in 2015-16 was Rs6,221.2 crore.

The report also shows that the share of agriculture and rural development in development expenditure (capital) in Uttar Pradesh has been less than the national average. An additional squeeze on the state budget due to the farm loan waiver could widen this gap.

As pressure on land increases in India, the only way to keep the rural economy afloat is to promote crop yield growth and diversification away from cultivation activities. For both these goals, public sector investment is of immense importance, as it complements rather than crowds out private investment.

Uttar Pradesh fares badly in terms of share of income from non-cultivation activities and share of investment in total agricultural income, according to the latest farm situation assessment survey of the National Sample Survey Office conducted in 2013.

This is a reflection of a stagnant and bearish farm economy, which is more vulnerable to exogenous shocks such as a crash in prices or monsoon failure. It is unlikely that farm-loan waivers would help Uttar Pradesh’s farmers in meeting these long-term challenges. What Uttar Pradesh, and the rest of the country, needs is smart public investments that help raise farm and rural incomes sustainably.

Data from the Centre for Monitoring Indian Economy shows net irrigated area in Uttar Pradesh has come down from 14.49 million hectares in 2000-01 to 13.43 million hectares in 2010-11. However, the ratio of net irrigated area using tube wells has increased from less than two-thirds to a little less than three-fourths of the total irrigated area. The proliferation of tube wells, if left unchecked, will deplete groundwater resources drastically, and seriously jeopardize sustainability of farming. This is not a problem unique to Uttar Pradesh but, as in most other parts of the country, very little has been done to stem the depletion of groundwater resources.

None of this is to deny the widespread agrarian distress in India, which has become systemic in nature. Farm loan waivers, like the one announced in Uttar Pradesh, would provide limited relief where none was available. However, it is also a fact that farm loan waivers are at best a palliative for India’s crisis-ridden agrarian economy.

A 2014 World Bank study on the farm loan waiver announced in 2008 by the United Progressive Alliance government found that the scheme had no significant effect on productivity and investment in agriculture, and, in fact, worsened loan allocation in districts with greater exposure to the debt waiver.

Unless farmers are given the right incentives to shift to more remunerative and sustainable farming and non-farming options, Indian agriculture will not be able to overcome its current crisis.

In recent years, the livestock sector has emerged as an important source of non-farm income in many parts of the country. Uttar Pradesh has emerged as the biggest exporter of buffalo meat in recent years but that sector is unlikely to grow in an environment of irrational hysteria around cattle protection.

The Uttar Pradesh government’s policy of providing palliatives such as loan waivers on the one hand, and its disruption of the cattle economy on the other, suggests that despite an overwhelming majority in the state assembly, the government is more interested in populism than radical reforms to boost farming and rural livelihoods in the state.