Many states in India such as Uttar Pradesh, Punjab, Rajasthan, Karnataka, Tamil Nadu and Maharashtra have announced huge packages for farm loan waiver. Other states have also raised similar demands.
This demand for waiver is due to the rural distress faced by the farmers, caused by consecutive droughts in two years followed by the recent decline in food prices despite bumper crop production.
In a farm loan waiver scheme, the Centre or the state Government repays the loan to the banks on behalf of the farmers.
This is intended to bring relief to the farmers suffering from indebtedness and hence driven to commit suicide.
Impact of farm loan waiver
Farm loan waiver is a populist move announced mostly before elections. It does not address the underlying problems faced by the Agricultural sector. It is counter-productive in the long run for farmers and adversely impacts banks as well as the state.
Reliance on non-institutional or informal sources: By its very definition, loan waivers will help those farmers who have taken loans and that too from institutional sources like commercial banks. Small and marginal farmers usually rely on non-institutional sources of finance like moneylenders, family members etc. This article in Livemint finds that, as per 2013 data, only 48 % of the marginal farmers had outstanding loans as compared to 79 % of large farmers. Also, the majority of the indebted marginal farmers (62 %) had taken loans from non-institutional sources.
Moral Hazard: The RBI Governor Urjit Patel has warned that loan waivers will create moral hazard. It will incentivise farmers not to pay in anticipation of future waivers. A research by World Bank on the farm loan waiver scheme announced by the UPA-I in 2008-09 reveals that the waiver causes an increase in loan defaults, especially in the electoral cycle after the scheme, in the hope of a waiver. It destroys credit culture.
Discourage lending by banks: For Banks, the farmers whose loans have been waived is a defaulter. This discourages lending to the beneficiaries of the waiver scheme (in this case, farmers). This article is India today has reported that, as per a World Bank paper, a loan waiver scheme is followed by a decline of about 4-6 percent in new loans for the benefiting group.
Impact state finances: Huge packages for waivers impact the state budget. It also reduces fiscal space of the Government to undertake capital expenditure in agriculture and other sectors. As mentioned in the Economic Survey 2017, the UP Government had to slash capital expenditure by 13 % (excluding UDAY) to accommodate loan waiver.
No improvement in farm productivity: Farm loan waiver does not lead to any benefits to the farmers in terms of productivity. This article finds that there is no improvement in farm productivity for households qualifying for loan waiver. This indicates a failure of the programme to achieve its desired goals.
Empirical evidence suggests that farm loan waiver is a short-term solution which is counter-productive for the farmers in the long run. It fails to address the structural problems in the Indian agriculture.
Instead of looking for quick-fix solutions for electoral gains, the government should work to strengthen the repayment capacity of the farmers by ensuring that they have the means to utilise the loan productively.
It should invest in agricultural research and modern agriculture technology to improve farm productivity. The farmers will be able to break the vicious cycle of debt only if the loan generates enough income for them.
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