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Todays Date
21 November 2017

Are farm loan waivers the right thing to do?

Farmer protests turning violent across the nation are tell-tale signs of their brute anger against the government administration and that reforms are not working out for them. It has mostly been engendered by the demonization fiasco of the present government. Farm loan waivers, however, don’t offer any sustainable solution. Opposition parties cry foul when waiver makes the ruling party gain political points. They even create additional troubles and appeals in case of non-compliance. India’s politics in agriculture is complex and confusing.   

Statements made by the heads of State Bank of India and Reserve Bank of India expressing their displeasure over the decisions made by State governments to issue massive farm loan waiver were met with boisterous uproar and public demonstrations.  

 Reserve Bank of India (RBI) governor Urjit Patel: “I think it (farm loan waiver) undermines an honest credit culture, it impacts credit discipline, it blunts incentives for future borrowers to repay, in other words, waivers engender moral hazard. It also entails at the end of the day, transfer from taxpayers to borrowers. If on account of this, overall government borrowing goes up, yields on government bonds also are impacted. Thereafter it can also lead to the crowding out of private borrowers as higher government borrowing can lead to an increase in the cost of borrowing for others.”  

India now faces $49.1 billion farm-loan waivers which is equivalent to 16 times the budget for rural roads in 2017, as reported by Hindustan Times.

 

  • A World Bank study shows that loan waivers are not a solution to farmer problems. 
  • Loan waivers have no significant impact over investment in farmland or labor-market outcomes.  
  • The cycle of regulatory forbearance has to end as it indirectly incentivizes default over borrowed farm credit. 
  • The resultant distortions created in the market increase the cost of credit as well as interest. State governments find it difficult to invest in capital expenditure. 
  • Increase in government borrowing to manage the fiscal deficit causes a decrease in private borrowing.  The 14th Finance Commission has given specific instructions that State fiscal deficits must not cross the 3% mark.
  • There are no indicators of farmers investing more in productive assets after they receive waiver, rather they tend to spend more on consumption. 
  • Approximately, 32.5% small and marginal farmers are still borrowing from the non-institutionalized sources of credit, and hence their problems never get solved through this methodology. The objective of reducing farmer suicides are unfulfilled due to this lack of financial inclusion. NRCB data validate these claims.
  • Around 22.1 million farmers won’t benefit from loan waivers.
  • Agricultural NPAs have skyrocketed, putting burden on public money and economy.

 

The government needs to invest more in multiple aspects of agricultural development such as crop insurance, irrigation, market-linkage, agricultural research, cold chain infrastructure etc. An increase in minimum support price is a more viable solution for this distress as suggested by agricultural scientist M.S. Swaminathan. Loss of farmers is a loss to the nation. With steps taken in the right direction, any catastrophic drought or calamity can be addressed, maintaining the food security of India along with the livelihood of millions of farmers.  

Mausam Bharati

Staff Writer at Legal Desire Media and Publications
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