Losing Interest While Paying Back: Another Round Of Farm Loan Waiver

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Farmers in India find themselves back at square one. After having their loans waived off by the nation-wide scheme floated by the Congress-led United Progressive Alliance (UPA) government in 2008 (just a year before the general elections) labelled the Agricultural Debt Waiver and Debt Relief Scheme, which waived off more than ₹ 52,000 crore held in the loan by 3.45 crore farmers (CAG Report 2015), they now find themselves again in the dearth of aid.

Millions are crushed under piling debt as a by-product of inflation and stagnated incomes, resulting in rage and subsequently biting protests, especially in Maharashtra, Madhya Pradesh, Haryana, Rajasthan and Panjab, with the centric demand to write-off loans. After the Yogi Adityanath’s government wrote-off ₹ 35,000 crore in farms loan, the outcry disseminated to Madhya Pradesh leaving five people dead, and in Maharashtra, cultivators protested for a week, which concluded on Sunday only after the government made public their call to waive off loans of 1.34 farmers tallying to ₹ 30,500 crore.

The Union Finance Minister Arun Jaitley has already made it unambiguous that the central government will not be funding the waiver in any way, notwithstanding PM Modi’s promise of a loan waiver during the UP-election campaign. In almost all dominant agrarian states, the loans of small farmers are close to 80% of the fiscal deficit last year.

  • In Madhya Pradesh, the predicted loan waiver for small and marginal farmers with less than 2 hectares of land would tab roughly ₹ 30,000 crore, which is 85% of the state’s agriculture budget.

  • Farmers in Rajasthan owe ₹ 67,500 crore to banks, which is double the state’s fiscal deficit and CM Vasundhara Raje will be going to polls next year.

  • The motherland of Green Revolution in India, Punjab, has farmers owing ₹ 90,000 crore to banks, but the government itself has around ₹ 2 lakh crore- almost half of its 2016-17 budget- as state debt.

  • Maharashtra will face a 30% markdown in development investment for the sake of waiver.

aaaMoral Ramification

Farmers loan in India have seen an exponential surge over the past five years and hence the quantum of loans that will have to be waived off would be significantly higher than in 2008. SBI’s Economic Research Department in a report on Monday said that this number could be as high as ₹1.5 lakh crore, considering in UP and Maharashtra alone, it’s more than ₹ 30,000 crore.

In response to the UP-loan waiver plan, RBI Governor Urijit Patel said in April that such waivers were a “moral hazard” to the economy. Kishor Tiwari, an agricultural activist and chairman of government constituted task-force on proposing solutions to the agrarian crisis, said the relief should be disposed exclusively to farmers afflicted by drought and those who can’t offset dues, thus wanting to have a case-by-case examination for loan waiver. Chairman of National Bank for Agricultural and Rural Development (NABARD) Harsh Kumar Bhanwala said, “Debt waivers create a moral hazard from a credit repayment perspective and we cannot have omnibus waivers.”

The repeated inept loan waivers, in the past, have shown once and for all to be an inferior way of bestowing relief to farmers as it disturbs the credit culture in the economy. Banks under the jurisdiction of the state governments will be the burden sponge considering the ‘no help signal’ from the centre. As soon as such a waiver is revealed, there is a slump in credit discipline because the beneficiaries start expecting future waivers, and to further add to the problem, farmers who pay time-honoured installments halt their own repayments. Wretched credit discipline makes the banks reluctant to sanction fresh loans. A further line of reasoning against loan waiver that should be discussed is, if loans borrowed for agricultural purposes, which essentially count on environmental settings can be waived off, why not waive off loans for all variety of industries that rely upon the same aspect? With the Maharashtra government joining the loan waiver spiral with UP and Punjab, loan waiver can be and should be viewed as a ‘populist action’, whose implementation will result in flying risks of dysfunctional credit discipline in the economy because there will be no incentive for honest payers to payback as compared to those who protest, but are capable of repaying.


About the Author:

Parth Gupta (Dept. of Economics, PU Campus)

Parth Gupta (Dept. of Economics, PU Campus)

I’m 18. I play a bit of guitar. Eternally on tap to share good music. Only problem with political jokes is that they get elected, and I write about them.

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