Why everyone loves Yogi Adityanath's loan waiver

It's been a little more than two decades since Magsaysay award-winning journalist P Sainath's Everybody Loves a Good Drought hit the Indian conscience (or maybe it didn't). It's 2017, and the book continues to be relevant.

The newly anointed chief minister of Uttar Pradesh, Yogi Adityanath, in his first cabinet meeting, waived crop loans worth Rs 36,359 crore. With that, the chief minister fulfilled one of the main poll promises made by the BJP.

The loan waiver that the Yogi government announced happens to be the biggest ever in the country by any state. In fact, it is the more than half the amount that the UPA government waived in 2008 for the entire country.

While more than 86 lakh farmers (who took loan from any bank before March 31, 2016) will be benefitted, the move for sure will put other state governments, especially Punjab and Maharashtra, under intense pressure to follow suit. 

Interestingly, on the same day that the Yogi government announced its decision in UP, the Madras High Court ensured a similar bonanza for Tamil Nadu farmers through its order.

The court instructed the Tamil Nadu government to waive loans of all the farmers rather than limiting the benefit to just small or marginal farmers.

The court restrained officials from initiating legal or recovery proceeding against any farmer for defaulting on payment.

But what is it about loan waiver that everybody seems to justify it? 

Why political parties love it

Remind any politician about unfulfilled promises and the answer you might get is — we don't have a magic wand. But loan waiver is one such magic wand that most parties seem to have discovered and putting it to maximum use.

The reason is not difficult to see. It is a cognisable offence to offer money to voters during elections since it's considered bribe. But the Election Commission is okay with leaders promising loan waivers during election campaigning.

How does such offers of money, "if voted for power", not amount to bribery?

Why is it so difficult to see that this is the easiest way to lure the voters, and it seems to be working after all.

Even when the UPA government came back to power in 2009, it was largely credited to the loan waiver scheme announced in 2008.

So, this has indeed turned out to be a sure-shot formula.

Capt Amarinder Singh already met Prime Minister Narendra Modi, reportedly seeking assistance for loan waiver in Punjab. In Maharashta, Devendra Fadnavis is under intense pressure from the Shiv Sena to dole out similar favours.

But can it be ignored that farm loan waivers often come at the cost of cutting corners in other sectors such as investment and infrastructure. There is a dire need in UP to invest in irrigation infrastructure where farmers are mostly at the mercy of rain gods.

A study by an expert group has suggested that 1 per cent increase in irrigation facilities directly increases the GDP by 1.25 per cent.

But for the political parties, waiving farm loans seems to be the easy way out and serves the purpose of satisfying the politically important constituencies.

Of course, farmers love it

There is no denying that farmers have been hit by drought and other natural calamities and were genuinely not in a position to repay their loans. To that extent, loan waiver seems to be a rational step by any welfare state.

But what do you call an overarching loan waiver scheme, which includes all farmers (small, marginal and bigger)? Is it not vote-bank appeasement?

Over the years, farmers have become used to loan waivers, especially during election time. Every time elections are round the corner, the list of defaulters increase.

Often a loan waiver scheme turns out to be an advantage for the defaulter and a disincentive for the honest payers.

Several studies have shown that in many cases farm loan amounts have been diverted for other purposes.

The loan waiver is mostly meant for small and marginal farmers. But none other than CAG has pointed out that the even the loan waiver of UPA I government was fraudulently availed by the big farmers for whom it was not intended.

Why banks love it

When SBI chairperson Arundhati Bhattacharya said that loan waivers disrupt the credit discipline, she faced attacks from various quarters. But the fact is that recovery of farm loans from wilful defaulters (who use the cheap farm loans for various other purposes rather than repaying the bank) is a big headache for banks.

The banks, especially in public sector, are under tremendous political pressure from their bosses to go out aggressively and give loans to small and marginal farmers whose repaying capacities are doubtful.

While the percentage of bad farm loans as well as non-performing assets (NPAs) have increased rapidly over the years, recovery of farm loans often proves to be an uphill task for banks, not to mention the cost involved.

First, the banks need to send a battery of employees to collect repayments during the harvest season. Collections become even more difficult when the elections are around since farmers anticipate a loan waiver scheme to bail them out.

Recovery from defaulters through legal route is even more difficult and time-consuming affair.

So, in a situation like that loan waiver comes to their rescue. Although loan waiver are bad for the health of banks as they strain their resources, but it also gives a chance to wipe the slate clean of NPAs.

Getting the amount credited against the farm loan from a state or the central government is much more easier that dealing individually with the defaulters.

But should that be enough reason to love loan waivers?

Also read: PM Modi must think beyond loan waiver to stop farmer suicides