How farm loan waivers helped politicians reap a rich harvest
There was widespread violence in Mandsaur recently, incidents of arson were reported, and farmers took to the streets demanding enhanced minimum selling price and loan waiver. To placate them, Madhya Pradesh CM Shivraj Singh Chouhan announced a loan settlement, with a farm loan waiver of Rs 6,000 crore. The state is also contemplating a formula wherein it may waive off interest on crop loans.
This came after the Yogi Adityanath government in Uttar Pradesh announced a loan waiver of Rs 36,359 crore, and Devendra Fadnavis' government in Maharashtra followed suit with a similar offer of Rs 30,000 crore. The Chhattisgarh government is also expected to extend Rs 3,200 crore as interest-free loan to farmers.
The moot question that arises is – is farm loan waiver the new flavour in Modi government’s politics, and are such waivers a good thing?
There were apprehensions of similar demands from farmers of other states when the UP government announced its relief package in April. Now this is exactly what is happening.
It has set off a chain reaction. The BJP government in Rajasthan provided loans worth Rs 44,000 crore to farmers in the last three years and it aims to take this figure to Rs 70,000 crore in the next two years. Punjab CM Amarinder Singh has also promised waiver of loans to farmers in the Congress-ruled state, and has reportedly asked for the Centre’s support. The demand comes in the wake of total farm indebtedness in Punjab being over Rs 70,000 crore.
Gujarat and Himachal Pradesh will be going for elections by December, and similar demands are likely to be raised in these two states, as well as in Karnataka, Chhattisgarh, Madhya Pradesh and Rajasthan, all of which are due for polls next year.
Waiving off farm loans serves as an effective poll plank that is often used by political parties in India. While the Centre has waived off farm loans twice - once in 1990 and then in 2008 - states have taken such decisions from time to time.
Agriculture contributes nearly 15 per cent to India's GDP and provides livelihood to a large population. Such relief schemes affect a majority of the rural population, making it a perfect plank to win elections. Successive governments have extended crop loan waivers but fall short of providing real solutions to farmers' woes. Thus, it has proved to be a misplaced move with an eye on immediate political gains.
It is not only the BJP government that has waived off the loans. Various governments including the Congress have done so in the past.
VP Singh government (1990)
In 1990, PM VP Singh’s government announced an agricultural debt relief scheme of up to Rs 10,000 for each borrower. The move was in line with the promise he had made in the run-up to the Lok Sabha elections.
Manmohan Singh government (2008)
The UPA government announced a Rs 60,000 crore farm loan waiver under the "Agricultural Debt Waiver and Debt Relief Scheme of 2008". The move paid well to the Congress which returned to power in 2009.
Haryana (1987)
Chaudhary Devi Lal, during the 1987 Haryana Assembly elections, promised to waive off cooperative loans under Rs 20,000.
Tamil Nadu
Tamil Nadu has a long history of farm loans being forgiven. In 1996, CM Karunanidhi, soon after coming to power, announced relief to farmers by waiving off 3 per cent penal interest, which cost the exchequer Rs 20 crore. In 2004, the Jayalalithaa government again waived off interest amounting to Rs 61.05 crore. In 2006, the Karunanidhi government waived off all farm loans taken from cooperative banks, which amounted Rs 6,866 crore.
Telangana and Andhra Pradesh
In 2014, TDP supremo Chandrababu Naidu and TRS chief K Chandrashekar Rao (KCR) rode to power in AP and Telangana respectively on the popular promise of farm loan waiver. Both states announced waiver schemes in 2014. The cost was estimated at Rs 43,000 crore for Andhra Pradesh and Rs 20,000 crore for Telangana.
Studies on loan waivers
There is no denying that agriculture needs the support of the government on many fronts. A large rural population depends on farming for livelihood and losses in successive seasons on various accounts force farmers to seek employment in other sectors. But is loan waiver the real solution?
There are many studies that have found that such schemes do not provide the desired result:
Indian Statistical Institute (Kolkata) and World Bank
- The study showed that loan waiver is not a solution to the Indian agriculture mess.
- The 2013 study also showed an increase in loan repayment default after the central government announced waiver of Rs 60,000 crore in 2008, a year before the general election.
- Honest farmers repaying loans also turned defaulters after the waiver.
Another study - The Economic Effects of a Borrower Bailout: Evidence from an Emerging Market - by Xavier Giné and Martin Kanz of the World Bank said such moves can affect agriculture output in the medium to long term as banks may get more selective in extending credit.
2015 ICRIER paper
- The massive write-off of loans in 2008 took its toll on banks, increasing non-performing assets of commercial banks threefold between 2009-10 and 2012-13.
Arundhati Bhattacharya, State Bank of India chairperson, said farm loan waivers lead to credit indiscipline, for which a privilege motion was moved against her in the Maharashtra Assembly.
Reserve Bank of India governor Urjit Patel had also expressed his displeasure at the spate of loan waiver announcements in different states. He said: “I think it undermines an honest credit culture. It impacts credit discipline. It impacts incentives for future borrowers to repay. In other words, waivers engender a moral hazard.”
Banks and other lending institution are worried about default in repayment on their farm loans in anticipation of a waiver on the lines of the one announced in Uttar Pradesh. The four states - UP, Maharashtra, Punjab and Tamil Nadu - account for 36 per cent of total agri-lending (Rs 8.08 lakh core) in FY17 till December.
But the fact is that the government also has a mandate to take care of the social security of farmers.
The majority of farmers still depend on traditional ways of farming, including natural mode of irrigation. The country needs massive investment in the areas of irrigation, storage facilities, roads, markets and agricultural research. Promotion of scientific ways of farming and building rural infrastructure would go a long in building a rural economy. But the truth is that state governments and the Centre have lacked the vision and the resolve to implement effective solutions to counter the real problems. Why can’t the massive amount that is spent on farm loan waivers be better spent on schemes that help farmers in the long-term?
Economics of loan waiver: Farm loan versus debt
According to official data, agricultural loan outstanding stood at Rs 12.6 lakh crore as of September 2016, while more than half of the households engaged in farming are in debt, with an average loan burden of Rs 47,000; 52 per cent of India’s agricultural households have debt.
Uttar Pradesh
Debt: Rs 4 lakh crore
Farm loan waiver: Rs 36,359 crore
Maharashtra
Debt: Rs 3.5 lakh crore
Farm loan waiver: Rs 30,000 crore
Tamil Nadu
Debt: Rs 2.1 lakh crore
Farm loan waiver: Rs 8,000 crore
Madhya Pradesh
Debt: Rs 1.24 lakh crore
Farm loan waiver: Rs 6,000 crore
Andhra Pradesh
Debt: Rs 1.4 lakh crore
Farm loan waiver: Rs 20,000 crore (2014)
Telangana
Debt: Rs 88,000 crore
Farm loan waiver: Rs 17,000 crore (2014)
Chhattisgarh
Debt: Rs 38,000 crore
Interest free loans: Rs 3,200 crore
Punjab
Debt: Rs 1.3 lakh crore
Waiver demand: Rs 70,000 crore
Rajasthan
Debt: Rs 2 lakh crore
Waiver demand: Rs 70,000 crore
Karnataka
Debt: Rs 1.7 lakh crore
Waiver demand: Rs 52,500 crore
Haryana
Debt: Rs 1.25 lakh crore
Waiver demand: Rs 56,000 crore
The cost to the government
Now if all the states waived off farm loans, it will cost the country Rs 3 lakh crore. Extrapolating it comes to around 2 per cent of India’s GDP. Can the country really afford to undertake a fiscal risk?
Suffice it to say that though the country is reeling under a farm crisis, a farm loan waiver just proves to be a quick fix solution and not a long-lasting approach. It has been used by political parties from time to time just for electoral gain and has not served any good in ameliorating the condition of farmers.
The 2006 MS Swaminathan report that had called for fixing the minimum support prices (MSP) for crops at levels at least 50 per cent more than the weighted average cost of production, was incorporated in BJP's 2014 Lok Sabha election manifesto. But the so-called Swaminathan formula of minimum 50 per cent profits remains a mirage for the farming community.
It has been ten years since the National Commission of Farmers under MS Swaminathan had given a slew of recommendations to improve the conditions of farmers but nothing seems to have been done in this regard.