Farm loan waivers: A short-term political solution to a much larger problem
A fortnight after Yogi Adityanath took oath as the Chief Minister of India’s most populous state, the Uttar Pradesh government on Tuesday announced its decision to waive crop loans of small and marginal farmers.
Loans of up to Rs 1 lakh of 2.15 crore small and marginal farmers, totalling Rs 30,729 crore, was waived by the BJP government besides writing off Rs 5,630 crore in non-performing assets (NPAs) of 7 lakh farmers.
The decision was part of the Bharatiya Janata Party’s (BJP) promise in its polls manifesto for UP Assembly elections and was reiterated by Prime Minister Narendra Modi in many of his campaign speeches. Modi had promised that writing off farm loans would be among the foremost tasks of the BJP government in Uttar Pradesh.
In Uttar Pradesh, where a majority of the population depends on farming for their livelihood, the promise is believed to have paid well to the BJP.
Waiving farm loans has served as an effective poll plank often been used by political parties in India. Agriculture contributes nearly 15 per cent of the GDP in India but provides livelihood to a large population. Such schemes affect a majority of the rural population, making it a perfect plank to win elections.
While the Centre has waived farm loans twice – one in 1990 and another in 2008 – states have taken such decisions from time to time.
Here is a brief history of farm loan waivers in India
V P Singh government (1990):
In 1990, Prime Minister 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 that he had made during run up to the Lok Sabha elections a year ago and resulted in a total write-off amount of Rs 10,000 crore.
Manmohan Singh government (2008):
The UPA government proposed a farm loan waiver scheme in the year’s Budget. Under the ‘Agricultural Debt Waiver and Debt Relief Scheme of 2008’, the government announced a full waiver of dues up to March 31, 2007 for marginal and small farmers and one-time relief of 25 per cent rebate to other farmers.
The value of the loan waiver was pegged at Rs 50,000 crore; that of the settlement scheme at Rs 10,000 crore, according to a report by The Indian Express.
According to figures by the International Council for Research on International Economic Relations (ICRIER), the government disbursed Rs 52,516.86 crore up to 2011-12 under the scheme.
The move paid well to the Congress which returned to power in 2009.
Farm loan waivers by state governments
Chaudhary Devi Lal, during 1987 Haryana Assembly elections, had promised to waive cooperative loans under Rs 20,000.
The cost to implement the scheme was pegged at a staggering Rs 240 crore. But the scheme was never fully implemented and only Rs 34.31 crore was waived by the government.
Tamil Nadu has a long history of waiving farm loans.
Chief Minister M Karunanidhi, soon after coming to power in 1996, announced relief to the farmers by waiving 3 per cent penal interest, which cost the exchequer Rs. 20 crore.
An incentive of 7 per cent interest relief was also announced for those who had repaid their dues within the due date for loans taken during a specified period.
The incentive amounted nearly Rs. 36 crore and was was borne by the next J Jayalalithaa government.
Jayalalithaa’s government waived interest and penal interest to farmers who had paid their dues before November 30, 2001. The relief cost the government Rs. 256 crore.
In March 2004, the Government again waived interest amounting to Rs. 61.05 crore with respect to loans outstanding between April 1, 2003 and March 31, 2004 for farmers.
In 2006, the Karunanidhi government waived 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 Andhra Pradesh and Telangana respectively on a popular promise of farm loan waiver.
Both states announced waiver schemes in 2014. The cost of loan waivers was estimated at Rs 43,000 crore for Andhra Pradesh and Rs Rs 20,000 crore for Telangana.
With both government finding it hard to implement the schemes and Reserve Bank of India (RBI) not agreeing to it, they took a middle path to waive off the loan in several installments scattered over a period of four years.
How economists view farm loan waivers
Reacting to the Yogi government's move, RBI Governor Urjit Patel on Thursday said that such promises should be ‘avoided’ as they ‘entail transfer of taxpayers' money’.
Addressing the media here after the first monetary policy announcement of 2017-18, "There is a need to create consensus so that loan waiver promises are eschewed. It impacts credit culture and discipline. Farm loan waiver undermines the honest credit culture. It is a moral hazard."
"It entails transfer of taxpayers' money to private borrowers. It can lead to higher cost of borrowing for others," Patel added.
In 2014, Patel's predecessor Raguram Rajan too had questioned the effectiveness of farm loan waivers saying that such programmes had constrained credit flow to farmers.
“In some States, on certain occasions, we have had debt waivers. How effective have these debt waivers been? In fact, the studies that we have… show that they have been ineffective. In fact, they have constrained the credit flow, post waiver, to farmers,” he had said at the annual conference of the Indian Economic Association.
Bankers too do not subscribe to the concept of loan waivers as a government welfare scheme. The most recent example is when State Bank of India (SBI) chairman Arundhati Bhattacharya said that loan waivers affect credit discipline. The comment did not go down well with politicians who lack the will and vision to create a sustainable long term plan and rely on freebies as the only solution to appease farmers.
"We feel that in case of a (farm) loan waiver there is always a fall in credit discipline because the people who get the waiver have expectations of future waivers as well. As such future loans given often remain unpaid. Today the loans will come back as the government will pay for it but when we disburse loans again then the farmers will wait for the next election expecting another waiver," she said.
Her comment was so offensive for leaders in Maharashtra, where Opposition as well as ruling partner Shiv Sena are pressuring the government to waive loans, that a privilege motion was moved in the Assembly against her.
She was not the first banker to take a stand against loan waivers. In 2012, her predecessor Pratip Chaudhuri was quoted in Mint as saying: “Agriculture is a bit of an issue. That is because of moral hazard that was created in 2008 when there was a write-off of large agriculture loans.”
A 2015 ICRIER paper says the 2008 scheme to write-off loans took its toll on the banks and increased the on-performing assets (NPAs) of commercial banks threefold between 2009-10 and 2012-13, according to a Hindustan Times report.
A 2013 paper in the Indian Statistical Institute said there was deterioration in the repayment of loans after the loan waiver of 2008. The report said that farmers took longer to repay it after the 2008 loan waiver.
Such criticism establishes that loan waivers affect banks’ ability to grant loans and farmers’ discipline to repay those loans. In the long term, these factors impact crop loan cycle which only has a negative effect on farming.
Agriculture needs government support but is loan waivers the solution?
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 has forced farmers to seek employment in other sectors.
Yet, the criticism of the political class to such moves by successive central and state governments have been limited to political rhetoric and have rarely made constructive suggestions. The recent case of former UP CM Akhilesh Yadav targetting the UP government for "betraying farmers" is just another attempt to score political points.
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 of farmers. The massive amount that is spent on farm loan waivers could be better spent on schemes that help farmers in the long term. Majority of farmers still depend on traditional ways of farming, including natural mode of irrigation.
The country needs massive investment in ares 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.
However, doing so requires the courage to think beyond the immediate gains such misplaced moves may yield politically. Yet, the sooner we move forward with it, the better it is.