EVER since, the UPA government announced the biggest loan waiver of independent India in 2008 and successfully triumphed the next general elections, loan waivers evidently became a magical wand to win elections.
As a majority of 47% of the working population in India is engaged in agriculture and also as agricultural distress never seems ending, loan waivers appear as a light of hope for farmers going through numerous ordeals. This interim relief, though seem to provide some help to the farming community and garnishes vote, its actual benefit is quite illusionary. Loan waivers are like the band-aids that ignores the deeper malaise and the underlying problem of Indian agriculture.
Agricultural distress is more among farmers who have smaller land – holdings. As per as the report on Medium Term Financial Inclusion by Reserve Bank of India (RBI), marginal and small farmers, holding upto 1 and 2 hectares of land respectively, a majority of them don’t have access to banks and co-operative society for agricultural credit.
A whooping 63% of marginal farmers take loans from informal sources. The situation is no better for small farmers having a landholding size of upto 2 hectares. Almost 2/5th of them takes loan from informal sources.
Since, banks hesitate to give agricultural credit to farmers with small landholdings, almost half of the small and marginal farmers take loan from informal sources. Loan waivers, thus have a selective and preferential coverage.
A report published by RBI in 2013 on the loan waivers done by Congress led government in 2008, states that there was a huge commission and omission error. 13.5 % of the eligible beneficiaries didn’t get the loan waiver and 8.5% of the ineligible beneficiaries actually got the loan waiver.
The saga of bad implementation doesn’t ends here. Out of the total waivers announced in Uttar Pradesh, Punjab, Maharashtra and Karnataka, only 40% of the amount have been disbursed till now.
Loan waivers also create a moral hazard and promote financial indiscipline. It penalises farmers who work tirelessly and repay the loans. It has been seen that farmers start delaying repayments once elections are approaching in a state. After a delay in repayments for 12 months, these accounts turn into non-performing assets (NPA’s).
A report released by SBI research points out that there has been huge delay in repayments once loan waiver is announced in one state. Farmers in other states also expect the same. Beside the moral hazard issue, loan waivers also pulls of the structural reforms in agriculture.
In a span of 2 years, from 2017-19, the total expenditure on Pradhan Mantri Krishi Sinchayi Yojana (PMKSY) is 11 times lesser whereas expenditure on Pradhan Mantri Fasal Bima Yojana (PMFBY) is 8 times less than the loan waived from April 2017-19 i.e. 1.9 trillion rupees.
Loan waivers also trigger the fiscal deficit of the states. Loan waiver shifts the liability of the loans to the government. It’s a double edged sword. While government converts repayments to long term payment plan and it hits the bank who later shy away from lending to small and marginal farmers, the financial health of the state is also hit hard. The fiscal deficit of many states in India is way above the threshold level of 3% of the total GDP.
It is thus evident that farm loan waiver isn’t the right medicine to address agricultural distress. Investment in basic infrastructure – irrigation, soil, machines and seeds can only solve complex agrarian issues. Instead of waiving off loan, providing direct benefit transfer to farmers (as majority of them takes loan from informal sources) can be more rewarding.
Venkatesh Gupta is pursuing Computer Science and Engineering from Galgotias University, Greater Noida in India