Economics Current

Farmer Loan Waivers

Farmer Loan Waivers
Background A loan waiver is the waiving of the real or potential liability of the person or party who has taken out a loan, through the voluntary action of the person or party who has made the loan. Loan waivers by the government for loans taken by farmers are unique to India. The first nation-wide farm loan waiver was implemented in 1990 by the Janata Party government, led by then Prime Minister V.P. Singh and cost the government Rs.10,000 crores. On 29 February 2008, P. Chidambaram, then the Finance Minister of India, announced a relief package for farmers which included the complete waiver of loans given to small and marginal farmers. Called the “Agricultural Debt Waiver and Debt Relief Scheme”(ADWDRS), the 600 billion rupee package included the total value of the loans to be waived for 30 million small and marginal farmers (estimated at 500 billion rupees) and a One Time Settlement Scheme (OTS) for another 10 million farmers (estimated at 100 billion rupees). Till now, these are the only two cases of nation-wide loan waiver for farmers. Why are Loan Waivers needed? In India, with 52% of agricultural land being ‘un-irrigated and rain-fed’, the farmer’s income is at the mercy of so many factors starting from the weather to the water (most importantly the minimum support price offered by the govt. for the produce), the income is never enough to cover for the expenditure. This pushes the farmer into borrowing huge sums to sustain his family and his farm. Previously, the local moneylenders, called sahukars, were often the only sources of credit in the countryside. Even though they gave loans at an exorbitant rate, farmers had no other places to turn to in times of distress. It was partly to solve this problem that the government started nationalizing banks. The chief rationalization for this measure was to extend equity to farmers in India’s underserved rural areas. But over the years, a large percentage of loans were not returned to the banks and started adding up as NPA (Non-Performing Assets). This led to the unavailability of further loans to farmers, forcing them to borrow from money lenders at exorbitant rates and lead themselves to even more debts. Agrarian distress became central to the national discourse, with continuously rising rates of farmer suicides and widespread agitations by farmers being held demanding loan waivers, and the political parties had capitulated or competed by announcing Loan waivers for farmers. Current Scenario for Loan Waivers Agricultural NPAs began to rise again after 2015. This rise was real, policy-induced and a direct consequence of acute agrarian distress that spread across rural India after 2015. In the aftermath of widespread farmers’ protests between March and December 2018, the Central government is discussing a scheme to waive outstanding farmer loans. Till now, at least 11 States have announced schemes to waive outstanding farmer loans: Madhya Pradesh, Uttar Pradesh, Karnataka, Tamil Nadu, Maharashtra, Chhattisgarh, Punjab, Andhra Pradesh, Telangana, Assam, and Rajasthan. The pitch for waivers among States has added to the pressure on the Central government for a nationwide farmer loan waiver. Effectiveness and Criticism of Loan Waiver Schemes The Agricultural Debt Waiver and Debt Relief Scheme had faced sharp criticisms from many political groups, agricultural experts, and bankers. Critics said that the loan waiver was simply a populist move in view of forthcoming elections. An important feature of the program which was heavily criticized was that it covered only formal sources of credit and excluded any kind of informal loan. Thus, it benefitted wealthy and large-scale farmers who had access to institutional credit. Last NSSO survey of 2013 showed 52% of agriculture households were indebted but only 60% of those had taken loans from institutional sources. This means, only 31% of agriculture households (60% of 52% indebted households) are likely to benefit from loan waivers currently. Another section of economists and bankers argue that loan waivers represent poor policy as loan waivers have “reputational consequences”; that is, they adversely affect the repayment discipline of farmers, leading to a rise in defaults in the future. Simply put, many farmers take loans with no intention of repaying them. Farmers unable or unwilling to pay back bank loans know that politicians will be most amenable to write them off in return for political support. Such is the scale of the write-offs that they are nearing $12 billion, increasing by 38.2% in the fiscal year 2017-18 alone. Indian banks are saddled with non-performing assets (NPAs). With an NPA ratio of 9.85%, India had the fifth-highest NPA ratio in the world, ranking only after Greece, Italy, Portugal, and Ireland. Writing-off farmer loans is making the NPA problem worse and adding greater burdens to the taxpayer. What are some of the alternative solutions to this? •Not more lending institutions but better lending institutions with transparency and accountability. •Greater need to bring technology closer to the farmers. •Formation of smart villages where farmers would be empowered to store, process and package their produce so they can maximize their profits. •One of the biggest challenges facing agriculture is abysmally low and steadily falling investment levels. According to Agricultural Statistics of 2017, between 2011-12 and 2016-17, private investment has declined from 2.7% to 1.8% of GDP - pulling down total investment (both public and private) from 3.1% of GDP 2011-12 to 2.2% in 2016-17. This needs to be checked and more investment needs to be done in the agricultural sector to allow them to reap the rewards of technological advancements and modern farming methods. •Involving farmers in the deliberations to understand grassroots issues and work towards framing effective farming policies.

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