The politics and economics of farm loan waivers

Uttar Pradesh Chief Minister Yogi Adityanath recently announced a 36,000 crore rupees farm loan waiver which could trigger similar decisions by the Punjab and Maharashtra governments. Recently, dramatic protests by Tamil Nadu farmers in Delhi and a warning from the RBI Governor against loan waivers — have once again brought farm loan writeoffs under public glare.

 

Farm loans may be crop loans or investment loans taken to buy equipment. Both farmers and banks reap a good harvest when all is well. But when there is a poor monsoon or natural calamity, farmers may be unable to repay loans. The rural distress in such situations often prompts States or the Centre to offer relief — reduction or complete waiver of loans.

 

Essentially, the Centre or States take over the liability of farmers and repay the banks. Waivers are usually selective — only certain loan types, categories of farmers or loan sources may qualify. For instance, in 2008, crop loans and investment loans were waived for marginal and small farmers (those with less than 2 hectares of land ownership); other farmers were only given a 25 per cent reduction. The recent waiver in UP is also a selective one. The Madras High Court has directed Tamil Nadu to offer a waiver to all farmers in the State.

 

Agriculture in India has been facing many issues — fragmented land holding, depleting water table levels, deteriorating soil quality, rising input costs, low productivity. Add to this vagaries of the monsoon. Output prices may not be remunerative. Farmers are often forced to borrow to manage expenses. Also, many small farmers not eligible for bank credit borrow at exorbitant interest rates from private sources. When nature rides roughshod over debt-ridden farmers in the form of erratic monsoon and crop failures, they face grim options. Indebtedness is a key reason for the many farmer suicides in the country.

 

Loan waivers provide some relief to farmers in such situations, but there are debates about the long-term effectiveness of the measure. Critics demand making agriculture sustainable by reducing inefficiencies, increasing income, reducing costs and providing protection through insurance schemes. They point out that farm loan waivers are at best a temporary solution and entail a moral hazard — even those who can afford to pay may not, in the expectation of a waiver. Such measures can erode credit discipline and may make banks wary of lending to farmers in the future. It also makes a sharp dent in the finances of the government that finances the write-off. But farmers can decide the fortunes of political parties, and politicians are wary of antagonising them.

 

 

This idea seems to be bad politics as well as bad economics because it may win the political party some votes but is not sustainable in the long run. Waiver of loan is a plain action where the credit climate is hampered. It will be counter productive not only for the state but for the entire credit market.

 

It is a sub-optimal policy. A good policy would have been a set of things which were suggested by the Swaminathan Committee Report. On an average, the income of farmers is so low that their daily survival becomes a problem. Farm loan waivers is becoming a necessity now because these deep rooted problems are not being addressed related to farmers and their sufferings cannot be ignored. As per the NSSO’s 59th survey, about 40% of farmers dislike farming and would quit if they can therefore, finding of short-term and long-term solutions can severely impact food security.

 

 

The various national agricultural markets are yet to be linked (which means all trading happens within each, and not across), and powerful trader lobbies. Farm loan waivers may act as a temporary solution and can prove to be moral hazard in future because those farmers who are able to pay their loans might not pay it expecting a waiver. The banks may become wary in providing loans to the poor farmers who actually need it. If this is done, politicians may find it as a suitable way to bag votes in their favour again and again. These waivers will add to the NPAs of the banks and it will cost taxpayers. Anything relating to food - and hence its producers — concerns all of us. Farmers are not a happy lot — about 40 per cent of them dislike farming and would quit if they can, as per the NSSO’s 59th survey. Not finding short-term and long-term solutions can severely impact food security. On the other hand, loan waivers cost tax payers. For instance, about ?525 billion was spent on the loan waiver of 2008, as per the International Council for Research on International Economic Relations. The larger worry is that these costs may not be one-off, as politicians may wave this carrot to win elections. If you are an investor in bank stocks, you may have to worry, as waivers may add to the already elevated non-performing assets of banks. The magic wand of a waiver can offer temporary relief, but long-term solutions are needed to solve farmer woes. The problems need creative engagement through which the surplus workers in the farming sector can be taken away to more productive sectors through education and skilling thereby making farming more profitable and sustainable for all stakeholders.