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Insights into Editorial: The hazards of farm loan waivers


Insights into Editorial: The hazards of farm loan waivers



urjit patel



Recent events — the UP government’s waiver of farmer loans, dramatic protests by Tamil Nadu farmers in Delhi and a warning from the RBI Governor against loan waivers — have once again brought farm loan writeoffs under public glare.


Need for farm loan writeoffs:

Farm loans may be crop loans or investment loans taken to buy equipment. Both farmers and banks reap a good harvest when all is well. But when there is a poor monsoon or natural calamity, farmers may be unable to repay loans. The rural distress in such situations often prompts States or the Centre to offer relief — reduction or complete waiver of loans.

Essentially, the Centre or States take over the liability of farmers and repay the banks. Waivers are usually selective — only certain loan types, categories of farmers or loan sources may qualify.


Why is it important?

Agriculture in India has been facing many issues — fragmented land holding, depleting water table levels, deteriorating soil quality, rising input costs, low productivity. Add to this vagaries of the monsoon. Output prices may not be remunerative. Farmers are often forced to borrow to manage expenses. Also, many small farmers not eligible for bank credit borrow at exorbitant interest rates from private sources.

  • When nature rides roughshod over debt-ridden farmers in the form of erratic monsoon and crop failures, they face grim options. Indebtedness is a key reason for the many farmer suicides in the country.


Concerns associated with such moves:

Loan waivers provide some relief to farmers in such situations, but there are debates about the long-term effectiveness of the measure. Critics demand making agriculture sustainable by reducing inefficiencies, increasing income, reducing costs and providing protection through insurance schemes. They point out that 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. Such measures can erode credit discipline and may make banks wary of lending to farmers in the future. It also makes a sharp dent in the finances of the government that finances the write-off.

  • A blanket waiver scheme is detrimental to the development of credit markets. Repeated debt-waiver programmes distort households’ incentive structures, away from productive investments and towards unproductive consumption and wilful defaults. These wilful defaults, in turn, are likely to disrupt the functioning of the entire credit system.


Have such moves helped farmers in the past?

Studies done by the Kolkata based Indian Statistical Institute and the World Bank have showed that loan waiver is not a solution to Indian agriculture mess. The institute’s 2013 study showed increase in loan repayment default after the Central government announced farm loan waiver of Rs 60,000 crore in 2008, a year before general election. Honest farmers repaying the loan also turned defaulters after the waiver.

  • A study — The Economic Effects Of A Borrower Bailout: Evidence From An Emerging Market — by Xavier Giné and Martin Kanz of the World Bank said such move can affect agriculture output in medium to long term as banks may get more selective in extending credit.
  • A 2015 ICRIER paper said the massive write-off of loans in 2008 took its toll on the banks, increasing the non-performing assets of commercial banks threefold between 2009-10 and 2012-13.
  • Arundhati Bhattacharya, State Bank of India chairperson, said recently that the farm loan waiver leads to credit indiscipline for which a privilege motion was moved against her in the Maharashtra assembly.


Present bottlenecks:

The real crisis for Indian farmer is that he or she is not in control of the produce, unlike other businesses, and is dependent on cartel of traders to fetch a decent price. The cartel makes money in case of good or bad crop season as their margins remain intact . In fact, in case of a crop failure the trader profit margin rises whereas the farmer is in distress without remunerative price.

  • The governments – Centre and states – have repeatedly failed to break the cartelisation and their effort to create farm infrastructure through cold stores has helped the corporate sector more than the farmers.
  • Except some farmers in Maharashtra and Punjab, most of the cold stores built with help of the government subsidy are owned by corporates. So, now these corporates are buying produce in farms at cheap rates, keep them in cold stores, repackage them and sell them in malls in cities at thrice the purchase price. Neither the farmer gains nor the consumer.


What needs to be done?

To be sure, the agriculture sector needs government support but loan waivers are not the solution. On the contrary, expenditure on loan waivers will eventually leave less fiscal space for public expenditure in agriculture. India needs massive investment in areas such as irrigation, water conservation, better storage facilities, market connectivity and agricultural research. The problems in Indian agriculture are structural. They need long-term solutions. Loan waivers will only end up complicating the problem. The Indian economy has suffered a lot due to competitive populism in the past. It’s time parties and governments addressed the real issues.


Way ahead:

In India where annual agriculture waste is about Rs 96,000 crore, farm loan waiver is just a poll sop with no long term economic gain for farmers in distress. The money waived could be invested for creating infrastructure that makes farmers independent of cartel of traders and help them to reap maximum economic benefit of their produce.



The magic wand of a waiver can offer temporary relief, but long-term solutions are needed to solve farmer woes. There are many dimensions of the present agrarian crisis in India. The search for a solution therefore needs to be comprehensive by taking into consideration all the factors that contribute to the crisis. Furthermore, both short- and long-term measures are required to address the numerous problems associated with the agrarian crisis.