The BJP in the Uttar Pradesh elections promised of a loan waiver to the farmers in the state if it won the elections.
Not just them
- Punjab chief minister Amarinder Singh met PM to seek assistance for a loan waiver for farmers in the state.
- The Devendra Fadnavis government in Maharashtra is under pressure from its ally, the Shiv Sena, to do the same.
The move has been criticised by the SBI Chairman Arundhati Bhattacharya, for which a Congress leader in Maharashtra has submitted a breach of privilege notice against State Bank of India (SBI) chairman Arundhati Bhattacharya for “insulting farmers and the House” through her remarks on farm loan waiver. The SBI chairman is well within her rights to criticise the move and she is right too.
Though agriculture contributes about 15% to India’s gross domestic product, a majority of the population directly or indirectly depends on the sector for livelihood. But are farm loan waivers the right way of addressing the problems in Indian agriculture?
Why the loan waiver defies economic logic?
- Loan Waivers affect the credit discipline by affecting the credit pricing and disrupt the credit market.
- They create a moral hazard where institutions lend money recklessly and the farmers spend them on consumption and not use them productively so as to repay the loan by generating income from it.
- A World Bank study on the 2008 loan waiver by the UPA government just before elections when P Chidambaram was finance minister has found that the bank lending moved away from the districts where there is greater exposure to waiver. It has also been found to affect the agricultural output in medium to long term.
- The carrot of loan waiver increases the defaults of the loans in the election year as people think that the government would waive the loan even if they are not distressed and leads to a trap, a self-fulfilling cycle.
- Loan Waivers have Huge Fiscal Costs, upsets the fiscal discipline, it is estimated that the UP loan waiver may cost up to 28000 crores, 8% of the State’s revenue.
- The state GDP of UP has jumped by 59.3 per cent from 2011-2012 to 2015-2016, but the fiscal deficit has jumped from 2.13 per cent of the state GDP to 5.57 per cent of the state GDP, at a much faster pace.
- Agriculture sector needs more government support but loan waivers are not the solution, on the contrary, they are antithetical to the very essence of government support, because the loan waivers crowds out the productive investment of the government by leaving little fiscal space for investments in the much-needed areas like the irrigation facilities, storage facilities, market linkages and infrastructure, research and development etc.
- Once the loans are waived off, delay in government’s reimbursement together with the borrower’s refusal to repay their loans hurts the cooperative banks the most. Typically the commercial banks have funds to disburse new crop loans but cooperative sector banks have no other source apart from their reliance on the recovery of loans to give fresh loans.
- Deputy PM Devi Lal’s loan waiver scheme of 1990 had crippled rural credit structure to such an extent that it took decades to recover from its impact.
- Yet we still have progressive politicians using waivers as a political tool to come to power. Chandrasekhar Rao, Chief Minister of the newly formed Telangana state used it as an election sop and so did Chandrababu Naidu, Chief Minister of Andhra Pradesh- a man who is well known for his affinity to policies that induce development and the BJP now which considers itself to be aligning to the free market policies.
- In this competitive populism of the politicians, the farmer stands to be the biggest loser. For the short term they can reclaim his money, but after that he becomes non-bankable. Banks would naturally not like to lend to these farmers in the future as seen after 1990 and 2008. The priority sector lending is met by indirectly financing the farmer by giving the fertiliser, pesticide and seed companies enough leg room who in turn sell their products to farmers on credit.
Taking all these into consideration, the government needs to rethink its proposal and consider, instead, a relief package for distressed farmers without endangering agricultural credit.
When the Narendra Modi government says it wants to double farm income by 2022 through the transformation of Indian agriculture through e-NAM, prepaid irrigation, lab-to-land, per-drop-more-crop programmes, it strikes the right notes but the political discourse has again deviated on farmer loan waivers.