Farm Loan Waivers – Why Good Politics Makes For Bad Economics

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Agriculture is the social, cultural, political, and to an extent economic backbone of India. The Indian farmer is rightly valorised as the bulwark of the Indian system. So when the same farmer finds no light at the end of the tunnel, and chooses to end his life rather than attempt to repay the humongous debt accumulated, the Indian state weeps. The Indian voter is awakened. And political parties, bereft of ideas on how to solve the agricultural crisis we find ourselves in, resort to the low-hanging fruit of farm loan waivers. A farm loan waiver is when the state wipes clean a farmer’s debt, allowing him to get a fresh start, economically.

Unsurprisingly, state governments all over the country have resorted to farm loan waivers as an easy placative device – Uttar Pradesh, Punjab, Maharashtra, Rajasthan and Karnataka have all announced farm loan waivers in 2017 in the spate of farmer suicides. Indeed, the Madras High Court in 2017 ordered the Tamil Nadu government to extend similar waivers to small and marginal farmers.

The order by the Madras High Court (shown here) was stayed by the Supreme Court

Clearly, the image of the State government coming to the humble farmer’s rescue by waiving his loan makes for good optics. But the economic impacts can be troubling.

Impact of Farm Loan Waivers

As per the 2017 India Ratings Report, the farm loan waivers offered by the aforementioned five states widened the combined fiscal deficit of the states by a whopping 1,07,700 crore (or 0.65 percent of the GDP) in the financial year. The states are haemorrhaging money, at the opportunity cost of other capital-building enterprises.

There is a dangerous Domino Effect at work here – once one state offers a farm loan waiver, other states feel compelled or pressured to do something similar, even if their economic condition doesn’t allow it. And if they don’t, the State Opposition party is sure to dangle the carrot in front of voters.

The distortion of credit culture is massive – once the idea of the government waiving off a loan sets in, farmers who can afford to pay their loans are discouraged from doing so. This creates a significant moral hazard for borrowers – while they borrow the funds, the taxpayer bears the risk.

For the state governments, the fiscal impact is massive – the Uttar Pradesh waiver cost the exchequer ₹36,000 crore. These waivers contribute to the deteriorating fiscal position of the states, push them towards violating the FRBM (Fiscal Responsibility and Budget Management) targets. These waivers also lead to a drop in agricultural capital development (cold storage facilities, better forecasting, transportation facilities), because the states have fewer funds. This creates a vicious cycle of agricultural underperformance.

The Way Forward

It is important to understand that farm loan waivers have become necessary in the first place because for a vast majority of Indian farmers, agriculture is no longer financially viable. As per the NSSO, the average monthly income of a farm household in 2012-13 was a mere ₹6491. The solution lies in obviating the need for farm loan waivers in the first place, by leveraging agriculture as a financially viable industry.

While irrigation channels have opened up gradually, most of Indian agriculture remains rainfed

dedicated institutional credit mechanism is needed for farmers to avoid dependence on costlier informal credit, which invariably exploits the farmers through usurious interest rates.

Cropping patterns need to be improved through the setting up of Agro-Climatic Zones – the Latur drought in Maharashtra was partly caused by growing water-intensive sugarcane in drought-prone areas.

Improved irrigation infrastructure will make farmers less dependent on the increasingly fickle monsoon rains. So far, of the 142 million hectares of net sown area, only about 64 million hectares is irrigated.

Farmer profit needs to be maximized through agricultural marketing, real-time price discovery, and promotion of allied sectors like animal husbandry.

The Central Minister of State for Agriculture has already spoken out against farm loan waivers, and its negative impact on the credit and recovery system. As important as it is to curb farm loan waivers, what is necessary is a long-term approach to fix the bigger problem – making Indian agriculture profitable for the farmers.