Farm Loan Waiver – Explained Pointwise

The Maharashtra government has announced a Rs 35,000cr waiver scheme last week – which is against the caution & advisories by RBI against farm loan waivers & that could potentially impact credit culture & state finances.

Table of Content

What is the need for farm loan waiver? What are the arguments in favour of farm loan waiver? What are the arguments against the farm loan waiver? What can be the way forward?

What is the need for farm loan waiver?

The need of providing loan waivers arises due to following factors:

1. Skewed procurement: Physical procurement by FCI is conducted only for rice and wheat leaving out other crops.
2. Rainfed agriculture: Around 52% farm area is still unirrigated and dependent on rainfall, while drip irrigation and sprinkler is limited to 1.6% and 0.8% families respectively.
3. Informal credit disbursal: Non-institutional credit to agriculture is around 40%, which not only has exorbitant interest rates but also is exploitative resulting in reduced farm incomes and increased farmer suicides.
4. Problem of surplus or cobweb phenomenon: After the prices of an agricultural commodity shoot during a season of scarcity, farmers resort to boosting the production on the premise of the pre-existing demand and prices, leading to a problem of plenty in the next season when prices of the same commodity are at a low.

 

What are the arguments in favour of farm loan waiver?

1. Preventing Suicides: Indebtedness is a leading driver of farmer suicides. Waivers act as a humanitarian intervention to provide immediate psychological and financial relief to families trapped in a debt spiral.
2. Response to Natural Calamities: With over 50% of Indian agriculture still rain-fed, a single season of drought, unseasonal rain, or floods can wipe out a farmer’s entire income, making loan repayment physically impossible.
3. Small and Fragmented Landholdings: Roughly 85% of Indian farmers are small and marginal (owning <2 hectares). These holdings lack the scale to absorb shocks from market price volatility or crop failure.
4. Market Failures: Farmers often do not receive the Minimum Support Price (MSP) due to a lack of storage, cold chains, and a high dependence on middlemen. This keeps their profit margins so thin that even a minor setback leads to insolvency.
5. Boosting Rural Consumption: Removing the burden of debt interest frees up household income for essential spending on health and education, which can help stimulate the broader rural economy.
6. Breaking the Default Cycle: Once a farmer defaults on an institutional loan, they are barred from taking fresh credit. This often forces them into the hands of informal moneylenders who charge exorbitant interest rates.
7. Enabling Fresh Investment: By clearing the “debt overhang,” waivers allow farmers to become eligible for new bank loans to purchase seeds, fertilizers, and equipment for the next cropping cycle. 
8. Limitations of Minimum Support Prices: Only 22 crops are covered under MSP scheme and only about 10% farmers are aware of existence of MSP. Also when market prices fall below MSP, a majority of farmers who sell produce directly to markets are affected.

 

What are the arguments against the farm loan waiver?

1. Impact on Capital Expenditure: To fund a waiver, states often have to cut spending in other areas. Studies (such as those by the Madras School of Economics) show that governments frequently reduce capital expenditure—money meant for long-term assets like irrigation, roads, and storage—to manage the fiscal deficit.
2. Fiscal Deficit Targets: Large waivers make it difficult for states to stick to the 3% fiscal deficit limit mandated by the Fiscal Responsibility and Budget Management (FRBM) Act.
3. Moral Hazard: Even farmers who have the capacity to repay may intentionally default in anticipation of a future waiver.
4. Promotes credit indiscipline: Research by the RBI indicates that after waiver announcements, repayment rates often drop even among those not eligible, as the “expectation” of a future bailout sets in.
5. Worsening NPAs: This behavior leads to a spike in Non-Performing Assets (NPAs). For instance, following several state-level waivers in 2017, the agricultural NPAs of some public sector banks spiked significantly.
6. Formal vs. Informal Debt: Waivers only apply to institutional credit (Banks, PACS). However, the most distressed small and marginal farmers often rely on informal moneylenders, who charge much higher rates but are never covered by government waivers.
7. Provides relief to few farmers only: Small and marginal farmers constitute around 86% of all farmers in India and as per Niti Aayog, among this section those who avail themselves of institutional loans, are very few, in some states about 25% only, which is also the reason behind failure of loan waivers.
8. Access Gap: Data suggests that only about 50% of eligible farmers actually receive benefits due to administrative hurdles, documentation issues, or the fact that many small farmers have never had access to formal bank credit in the first place.
9. Credit Squeeze: Banks may become cautious about lending to the agricultural sector in states with a history of frequent waivers, fearing future defaults. This inadvertently reduces the flow of fresh, formal credit to the very people the government is trying to help.
10. Short-term Fix: Waivers treat the symptom (debt) rather than the cause (low productivity, market volatility, and climate risk).
11. Populist Tool: Critics argue that political parties use waivers as a “quick win” to secure votes, which diverts attention from necessary structural reforms like agricultural marketing (e-NAM), crop diversification, and cold chain infrastructure.

 

What can be the way forward?

Short term measures to offset the effect of loan waivers:

1. Waiving only a portion of loan: Waiving only a portion of the loan instead of placing a cap on the quantum of loan waiver will be an improvement towards averting moral hazards.
2. Fixed cash subsidy per acre: Instead of loan waivers government may provide a fixed cash subsidy per acre, by digitizing and identifying plots, as demonstrated by Rythu Bandhu Scheme of the Telangana government, which would cover all farmers.
3. Prohibiting loan waivers during elections: The Election Commission should prohibit announcement of loan waivers at the turn of elections to stem this populist practice.
4. Dismantling the informal credit-crop nexus (Arthiya system): Freeing the farmers from the tyranny of middlemen by reforming the commission agent system and promoting formal financial inclusion of farmers to bring them into direct contact with state institutions as around 40% credit to agriculture is non-institutional.
5. Restructuring loans: Instead of waiving loans, banks can restructure farm loans as done by NBFCs. This ‘restructuring’ will allow farmers to take a loan for next crop, and then start repaying both loans together, which will have different tenures, without affecting state deficits.
6. Aligning export policies with domestic production: During a surplus, export tariffs should be automatically reduced and during low production a cut in import tariffs should automatically click in for effective price realization of farmers without any need of government intervention.
7. Targeted action: To obviate the need of announcing loan waivers for whole state, government must focus on 29 highly vulnerable and disadvantaged districts suffering from low income and high climate vulnerability through special programmes.

 

Long term steps which could eliminate the need of loan waivers:

1. Crop diversification: Combating credit risk in the farm sector rests also on crop diversification and cross-holding of risks between agriculture and allied activities, such as animal husbandry.
2. Tenancy reforms and land consolidation and FPOs: Land consolidation and formation of Farmer Producer Organisations would give more bargaining power to farmers and when coupled with tenancy reforms, this would ensure legal status to tenants along with security of tenure. Kerala is the only State that has a tenancy law in place with an implementation mechanism.
3. Cooperative farming and push to agro-processing sector: Cooperative farming will allow small and marginal farmers to take the advantage of their family labour and allow economies of scale to kick in at lower thresholds, thus raising farmer incomes.
4. APMC to APLM: States must adopt the Model Agricultural Produce and Livestock Marketing (Promotion and Facilitating) Act (APLM), 2017, to promote agriculture livestock marketing along with overhaul in APMC acts.
5. Farmers to agripreneurs: Niti Aayog in its 2022 strategy has proposed further expansion of e-NAM to convert farmers into agripreneurs by incentivizing them to undertake agriculture entrepreneurship activities.
6. Integration of agriculture with industry: Primary producers should be integrated with both manufacturing and marketing activities and subsidies and tax concessions given to corporate sector should be given to rural entrepreneurs who are willing to start manufacturing firms that will process local raw materials and employ rural labour.
7. Reform in procurement: Government must ensure procurement and price stabilization mechanisms for other commodities also apart from wheat and rice.

CASE STUDY: Kerala State Farmers’ Debt Relief Commission: Under Kerala initiative, a Commission was established in 2007 and its seven-member team of farmers, legal experts, farm economists, political appointees and others went from village to village, spoke to farmers, screened their loan portfolios and decided on the quantum of relief. Within two years, farmer suicides had fallen sharply. Instead of bulk farm loan waivers, this is a continuous engagement. Round the year someone is talking to farmers, trying to understand what they are going through and how the state can help. The relief provided by the commission is not unconditional: The loan should be from the cooperative sector, which provides the bulk of farm loans. The applicant should be a small or marginal farmer, who owns or has taken on lease a crop area of less than five acres. The applicant’s annual income should not be over ₹2 lakh. The commission sits for several days in a village every month. In this way benefits reach the needy and this model can be emulated by other states too.

 

UPSC GS-3: Agriculture Read More: Indian Express