FARM LOAN WAIVER
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Context
- The Union government is not considering any proposal to waive loans of farmers.
- However, some major initiatives have been taken to reduce the debt burden of farmers- Union Ministry of Finance.
Farm Loan Waiver
- Farm loans are loans taken from the banks by the farmers for agriculture requisites and production.
- When there is a poor monsoon or natural calamity, farmers may be unable to repay loans.
- In a farm loan waiver scheme, the Centre or the state Government repays the loan to the banks on behalf of the farmers, simply by using public money collected in the form of taxes.
History of Farm loan Waivers
Medieval India
- The first recorded instance of granting loans to peasants in medieval India dates back to the regime of Muhammad-bin-Tughluq (1325-51) when, to ameliorate the distress suffered by villagers, Taccavi loans were advanced. However, faced with rebellion and famine, these loans were written off by Firoz Shah Tughluq, the subsequent ruler.
Modern India
- The first nationwide farm-loan waiver in independent India was implemented in 1990 by the VP Singh-led government.
- Since then, there has been a wave of such schemes by different State governments.
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Timeline of major farm loan waivers in India 2008: Rs 52,000 crore were released by the Indian government as part of the Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS), in order to address the financial indebtedness of the farmers right before the 2009 general election. 2014: In Andhra Pradesh, a farm loan waiver of Rs 40,000 crore was announced while a Rs 20,000 crore farm loan waiver was announced in Telangana. 2017: Uttar Pradesh announced a farm loan waiver of Rs 36,000 crore. Maharashtra soon followed suit with a Rs 35,000 crore waiver, though the actual amount is expected to be much greater. |
Rationale behind Farm Loan Waivers
- Monsoon Failure: In India, agriculture is highly dependent on monsoons. Farmers take heavy loans for crop production. If the crop fails due to lack of rains or insufficient market demand, farmers get trapped in debt and it leads to Farmer suicides. Thus to overcome this government waives farm loans.
- Food scarcity: Many farmers are leaving farming due to better money making alternatives. If this situation continues, there will be serious food scarcity. To prevent this situation, the government needs to gain the trust of farmers. Thus Farm loan waiver seems the only option.
- Debt Cycle: Many farmers borrow money from moneylenders at high-interest rates and get trapped in a never ending cycle of debt. Farm loan waivers help to divert these farmers to borrow money from banks instead of money lenders.
- Ineligible for bank credit: Many small farmers not eligible for bank credit borrow at exorbitant interest rates from private sources.
- Relief to Farmers: Agriculture in India has been facing many issues — fragmented land holding, depleting water table levels, deteriorating soil quality, rising input costs, low productivity. Output prices may not be remunerative. Farmers are often forced to borrow to manage expenses. Indebtedness is a key reason for the many farmer suicides in the country.Loan waivers provide some relief to farmers in such situations.
How effective are farm loan waivers?
- Understanding through Example:
- 1990: A working paper by the Indian Council for Research on International Economic Relations (ICRIER) – Credit Policy for Agriculture in India – An Evaluation – says that the loan waiver scheme of VP Singh proved a costly affair for the banks and economy. The report stated that the years after the waiver “witnessed a decline in the recovery rates by financial institutions, as farmers believed that they could default with impunity. It affected rural credit with defaults of such a high magnitude that it took the banks several years to recover from its impact.
Drawbacks of farm loan waiver
- Discourages Honest farmers: Loan waiver sends a negative signal to the markets. Honest farmers, some of whom take more loans to repay earlier one, or use their saving to repay loans, feel cheated.
- Incentivizes willful defaulters: It disrupts credit discipline. Farmers turn into wilful defaulters due to the next loan waiver scheme, which is bad for economy.
- No curb on informal credit sources: This ignores the dominant role of moneylenders and informal credit sources in the rural economy. The farmers who take loans from such sources are not benefitted from such schemes.
- Fiscal deficit: It increases the fiscal deficit of the state as the gross expenditure of state government exceeds the gross revenue which in turn causes low credit ranking for the state and so the cost of borrowing increases for the state.
- Right beneficiaries are not targeted: Rich farmers take loan even if there is no need, in the hope of the next loan waiver scheme. This impacts the farmers who are genuinely in need of loans.
- Vicious Cycle: Loan waiver is a relief only for one season, with the farmers going back to distress in the next season if the monsoon fails.
- Impact on long term growth: Loan waivers not only increase the fiscal deficit and interest burden of the states but also limit its ability to undertake productive capital expenditure in the agriculture sector. It affects the long term growth in the sector.
- Opens the Pandora’s Box: Providing loan waive in some states encourage farmers from other states to demand loan waiver even if they don’t need them.
- Just a political tool-Loan waivers are just a tool for politicians to gain vote banks in all elections and prevent them from coming up with the long lasting solution. Between 1987 and 2019, political parties lost elections only four out of 21 times following a promise/implementation of farm loan waiver. With more than 80 per cent success rate, these waivers offer a rather robust formula of electoral success.
- Promotes Corruption: Discrepancies were found in 22 per cent of the loan waiver cases- Public Accounts Committee Report. Corruption, errors in inclusion and exclusion of beneficiaries, inadequate documentation, unused funds lying with lending institutions and ineffective monitoring are rampant.
- Temporary Solution with moral hazard: Farm loan waivers are at best a temporary solution and entail a moral hazard — even those who can afford to pay may not, in the expectation of a waiver.
- Makes bank apprehensive: Such measures can erode credit discipline and may make banks wary of lending to farmers in the future.
Final thoughts
- Indebtedness in one form or another has been in existence for centuries.
- Measures like loan waiver can provide only a temporary relief, but long term solutions are needed to solve farmers woes.
- It is a populist and pet measure of politicians that can further worsen the banking habits of farmers and will be difficult to rejuvenate the credit culture between the lenders and the farmers.
- There is a pressing need for implementing Shanta Kumar Committee recommendations.
Read about the recommendations in detail here: https://pib.gov.in/newsite/PrintRelease.aspx?relid=114860
- Critics demand making agriculture sustainable by reducing inefficiencies, increasing income, reducing costs and providing protection through insurance schemes.
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