The Tricky Economics of Farm Loan Waiver

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After UP, Punjab and Maharashtra, the Rajasthan Government in its recent announcement, accepted the farmers’ demand for a Rs.39,000-crore loan waiver. Agriculture is facing serious crisis in India.

The associated hopelessness with agriculture is due to myriad factors causing grave distress to the sector. If we look at current commodity prices, they are almost at the same level as they were in 2006.

The high dependency of the farmer on the monsoon, weather extremities, the absence of critical infrastructure like adequate irrigation facilities and a reliable power supply, the unavailability of seeds, fertilizers and pesticides on time, the problem of formal credit availability, the fragmentation of  land hampering farm productivity, lower agricultural mechanization, the poor health of the soil, the high price variability, the low market integration, the absence of a good storage infrastructure, poor forward linkages to industry and existence of the multiple intermediaries are some of the major reasons for the plight of the Indian farmer.

In such a chaotic state of affairs, is farm loan waiving a convincing or a sustainable solution? What are the economic and financial implications of farm loan waiving policy?

Indian agricultural and allied activities form 15% of the country’s GDP. They share 11% of total exports and provides employment to about half of the population.  The importance of the sector from the macroeconomic perspective is reflected in the growth rate of bank credit for agriculture, which accelerated to 15.4% between 2000-01 and 2016-17. Outstanding bank advances to agriculture and allied activities rose from about 13 % of the GDP in 2000-01 to around 53% in 2016-17.

The steep rise in the credit flow to the agricultural sector is primarily due to a policy thrust was given to expand crediting, especially through priority sector lending (PSL). The share of outstanding advances to agriculture and allied activities as compared to total priority sector advances increased from 32.5% in 2000-01 to 43.2% in 2016-17.

The government has earmarked Rs.20,339 crore under the Interest Subvention Scheme for farmers for the year 2017-18. This will help each farmer getting a short-term crop loan of up to Rs 3 lakhs payable within one year at only 4% interest per annum.

The idea behind these initiatives is to catalyze bank credit flows to the agricultural sector. Despite such efforts of subsidized and directed credit flows, the situation remains chaotic. In the end, the political class desperate to get votes comes out with the ultimate solution of loan waiver, especially near the election years!

The Agricultural Debt Waiver and Relief Scheme announced by then UPA government in 2008 cost Rs.52,000 crore which was 0.9% of the GDP. In 2014, the Andhra Pradesh and Telangana governments granted farm loan waivers of Rs.24,000 crore and Rs.17,000 crore, respectively.

In the last two years so far various State Governments like Tamilnadu, Punjab, M-P, UP, Maharashtra and Rajasthan have granted farm loan waiver amounting about Rs.170,000 crore consuming around 1.1 % of the current GDP. India faces a cumulative loan waiver demand of Rs.3.1 lakh crore ($49.1 billion) or 2.6% of the country’s gross domestic product in 2016-17.

This combined with the refusal of the Central Government to share the financial burden caused by the waiving exercise is going to shoot up the revenue expenditure of the States and prevent their finances to reflect fiscal discipline.

The scheme deceivingly appears to be a relief measure but comes with a long list of inefficiencies like the poor targeting of beneficiaries, incentivising wilful defaulters and the erosion of credit discipline.

Farm Loan Waivers Being Demanded
State Waiver being demanded Small & Marginal Farmers In The State Source
Uttar Pradesh* Rs 36,359 crore 9.4 million Hindustan Times
Maharashtra* Rs 30,000 crore 3.4 million Economic Times
Punjab Rs 36,600 crore 1.7 million Live Mint
Madhya Pradesh Rs 56,047 crore 6.3 million Hindu Business Line
Gujarat Rs 40,650 crore 3.2 million Hindu Business Line
Haryana Rs 56,000 crore 1 million Indian Express
Tamil Nadu Rs 7,760 crore 1.9 million The Hindu
Karnataka Rs 52,500 crore 5.9 million DailyO

Besides, it bears strong implications on the macroeconomy like the weakening of balance sheets and deterioration of the asset quality of the lending institutions. Public sector banks (PSBs) are not in a position to absorb such write-offs as they are already striving for high recapitalization needs to follow new BASEL norms and accentuated by the Non-Performing Assets (NPA) crisis.

One cannot ignore the spillover effects of the crowding out of credit on the other economic agents. They are the unplanned revenue expenditure which does not get budgeted in the public policy and thereby negatively affect the fiscal discipline of the government and create inflationary pressures. In the economy, the other way to adjust the cost is a brutal cut in capital expenditure which could have been used to increase the productivity of the farming sector by addressing its basic structural issues like irrigation, connectivity, linkages and supply chain management etc.

The provision of social goods driven by public policy strictly puts an obligation on the government to direct it in such a way that it minimizes the inefficiencies involved and investing national resources on the fundamental and structural issues of the agrarian economy is much more efficient way than a mindless loan waiver.

Improvising crop insurance and infrastructure ecosystem, providing more irrigation facilities, technology-enabled productivity improvements, market integration, industrial linkages and, opening up the farm economy to market forces and making it a transparent trade are the areas where the work needs to be done.

It appears that the successive governments despite being aware of the tricky economics involved in the farm loan waiver, unfortunately, decided to buy some cheap political capital and but at a high economic cost.

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