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Still not the solution

It is important to highlight this classification of those seeking loan waivers since small and marginal ones constitute more than 90% of all farmers in Tamil Nadu.

Still not the solution
Outside the Prime Minister's Office, farmers from Tamil Nadu protested in the nude on Monday after they were not allowed to meet Narendra Modi to discuss the drought relief fund. These farmers have been sitting in protest for the past four weeks at Jantar Mantar. Besides a drought relief fund of Rs 40,000 crore, the protesters have demanded farm loans to be waived off and pensions for those farmers who do not work on the field anymore. Several parts of India are in the grip of an agrarian crisis as a result of bad monsoons, stagnating commodity prices, rising input costs and other structural bottlenecks such as weak linkages to markets and little access to risk management tools and techniques. Tamil Nadu's situation, however, is particularly troubling after the failure of both the south-west and northeast monsoons last year. What's worse, the Karnataka government refused to abide by the Supreme Court's orders to release Tamil Nadu's share of water from the Cauvery River, resulting in farm activity coming to a complete standstill from September to December 2016, and forcing the AIADMK government to declare a state-wide drought earlier this year. Last week, the Madras High Court directed the State government to waive all farm loans issued by nationalised and cooperative banks and ensure that no punitive action or loan recovery is initiated against them. In the order, the court made no attempt to differentiate between those farmers with large or small land holdings, and in fact argued that this distinction was "arbitrary". Last August the State government waived off the loans of small and marginal farmers amounting to Rs 5,780 crore taken from cooperative banks before March 31, 2016.

It is important to highlight this classification of those seeking loan waivers since small and marginal ones constitute more than 90% of all farmers in Tamil Nadu. The other 8% are made up of medium and large farmers who hold more than five acres of land. This distinction is a matter of state policy, something which the Madras High Court had ironically accepted back in 2008. "This Court cannot be oblivious to the fact that there exists a distinction between farmers owning five acres of land and farmers owning land more than five acres. Such a distinction is not per se discriminatory. This Court cannot hold that all farmers irrespective of the area of land held by them must be given the benefit of the waiver scheme," said AK Ganguly, who was then the chief justice. Its order last week was also criticised by other farmers groups, as they argue that less than 30% of the State's 30 lakh farmers have access to institutional credit. For most small and marginal farmers, the process of obtaining a loan from cooperative and public sector banks is a long-winded process with unsatisfactory outcomes. Over and above the Rs 5,780 crore released last August, the Tamil Nadu government issued drought relief worth Rs 2,300 crore earlier this year for debt-stricken farmers. Reports indicate that the court's order will add a further burden of Rs 1980 crores on the state exchequer, which is already reeling from a massive debt. For short-term relief during periods of extreme drought or flood, farm loan waivers are necessary. As argued in these columns, however, the problem is systemic. The price for agricultural produce has stagnated over the past decade, allied with rising input prices, according to the Food and Agriculture Organization (FAO) reports in 2016. With the spike in the cost of production, poor access to institutional credit, markets and crop insurance and sustainable irrigation facilities, there is nothing but suffering that awaits small and marginal farmers, unless there is a drastic improvement in these areas.

Farm loan waivers are no solution. "From a humanitarian perspective too, it is difficult to ignore the suffering of farmers. Economically, though, it is difficult to make a case for loan waivers—simply because there is no case to be made. Some pundits have equated these with some corporate debt restructuring exercises, but the solution to sweetheart debt restructuring deals that banks get into with companies—the country's largest bank, State Bank of India, entered into one with Kingfisher Airlines in 2012—lies in prevention, not in compensating by offering similar sweetheart deals to farmers. At another level, the solution to the agrarian crisis is better risk management and more efficient agricultural markets," says a recent editorial in the Mint. The Narendra Modi government has begun work in this regard, especially with the introduction of a new crop insurance scheme and the creation of a National Agricultural Market. Both efforts are in their infancy, and certain aspects require resolving. With some adjustments, these efforts could end up providing some relief. 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.

Fiscal conservatives believe that farm loan waivers have a deleterious effect on the budgets of both the Union and State governments, and increase inflation. "I think it undermines an honest credit culture. It impacts credit discipline. It impacts incentives for future borrowers to repay. In other words, waivers engender a moral hazard. If on account of this overall government borrowing goes up, yields on government bonds also get impacted. After that, it can also lead to crowding of the private borrowers as higher government borrowing can lead to increasing cost of borrowing for others," said RBI Governor Urjit Patel. During his tenure as governor of India's Central bank, even Raghuram Rajan argued that debt waiver schemes are ineffective and limit the flow of credit to farmers after their loans are waived off. None of these schemes plays a role in improving the lives of landless peasants, who have little or no access to bank loans, and other small farmers stuck under the thumb of vicious 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.
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