Loan waivers in Indian farm sector

Governments seem unable to deal with the agrarian crisis afflicting vast swathes of the country. On Saturday, the Centre approved nearly Rs 3000 crore from the National Disaster Relief Fund for drought relief, among other related concerns, in Tamil Nadu and Karnataka. This development follows a 20-day protest by farmers from Tamil Nadu in the national capital, where among other acts, they held the skulls of farmers who had committed suicide in their region to communicate the desperate state of affairs in their area. The protesters demanded a farm loan waiver, saying they are not in a situation to repay their debts because of severe droughts. Earlier this year, the Tamil Nadu government declared all 32 districts in the state as drought-affected, besides seeking a sum of nearly Rs 40,000 crore from the Centre to alleviate farm distress. Karnataka, meanwhile, is facing a second consecutive drought year. With farm income dwindling, and the debt trap making lives of farmers very difficult, governments are once again coming under pressure to waive loans. Prime Minister Narendra Modi once spoke of wanting to double farm income 2022 by transforming Indian agriculture. Despite some steps taken to this effect, the dominant political discourse continues to revolve around farm loan waivers—a favourite tool used by political parties when contesting elections. It was the promise of a massive farm bailout programme for the agricultural sector in late 2008, which propelled the previous United Progressive Alliance government to a second term the following year. Reports indicate that nearly 3.7 crore farmers had benefited from loan waivers of above Rs 52,000 crore. More recently, both the Telangana Rashtra Samithi (TRS) and Telugu Desam Party (TDP) in Telangana and Andhra Pradesh respectively, won elections in 2014 on the promise that the loans of farmers would be waived off. With a significant section of the voter base engaged in farm-related activities, it makes sense for political parties to promise loan waive offs during the election cycle. Before the recently concluded Uttar Pradesh elections, the Bharatiya Janata Party promised that if voted into power, it would write off loans of small and marginal farmers. As per recent figures published by the State Bank of India, the entire exercise is likely to cost Rs 27,400 crore or 8% of UP's total revenue. Newly minted Punjab Chief Minister Amarinder Singh has also sought central assistance for farm loan waivers, while Shiv Sena in Maharashtra is pressurising its ally in government, the BJP, to work towards the same. Several other states had also come forward with similar requests. Will the government accede to their demands too?

Economists and experts on agriculture, however, have spoken out against this practice. Fiscal conservatives believe that farm waivers have a deleterious effect on the budgets of both the Union and State governments, and increase inflation. During his tenure as Reserve Bank of India Governor, Raghuram Rajan argued that debt waiver schemes are ineffective and limit the flow of credit to farmers after their loans are waived off. Last month State Bank of India Chief, Arundhati Bhattacharya, received a lot of flak for saying, "credit discipline breaks when you waive off farm loans". At a time when public sector banks have written off massive loans for big businesses, it may have seemed like an insensitive statement. But scratch beneath the surface a little further, and Bhattacharya makes a valid point. A 2014 World Bank study on the UPA government's 2008 farm loan waiver presented some worrying insights. "We find that the stimulus program had no effect on productivity, wages or consumption, but led to significant changes in credit allocation and an increase in defaults. Post-program loan performance declines faster in districts with greater exposure to the program, an effect that is not driven by greater risk-taking of banks. Loan defaults become significantly more sensitive to the electoral cycle after the program, suggesting the anticipation of future credit market interventions as an important channel through which moral hazard in loan repayment is intensified," the study said. Moreover, none of these schemes plays a role in improving the lives of landless farmers, who have little or no access to bank loans, and other small farmers stuck under the thumb of local moneylenders. In fact, according to a 2013 report by the Comptroller and Auditor General of India on the UPA's 2008 farm loan waiver scheme, small farmers deserving of much-needed assistance were left out, while ineligible big farmers pocketed undue monetary gains. Of course, no story about this scheme is complete without the harmful impact it had on banks regarding their nonperforming assets. More than half of India's 90 million households engaged in agriculture are in debt, and they need the government's support. But the evidence seems to suggest that when a government spends vast sums on loan waivers, it reduces the scope for necessary public expenditure in agriculture. The concerns of the agriculture sector in India are structural in nature. What it needs is serious reforms, including making land leasing easier and legal, better access to markets for farmers, and massive investment in areas such as irrigation, superior storage facilities, water saving practices, and in-depth research into better agricultural practices to reduce dependence on the monsoon. Do farm loan waivers address these concerns? Do they resolve any of the above concerns? The answer is no. What is needed from governments is greater political will to implement all these reforms and measures. What farmers need is better remuneration for their crops, particularly in a time when land holdings are growing smaller, the quality is soil is deteriorating, and input costs are rising. A one-time loan waiver will not resolve any of these concerns.