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Farm loan waiver

Topics Covered: Government policies and interventions for development in various sectors and issues arising out of their design and implementation. Issues related to farm subsidies.

Farm loan waiver

What to study?

For Prelims: Which states announced farm loan waivers in last one year.

For Mains: Advantages and Disadvantages of farm loan waivers, the need for viable solution to farm distress.

Context: The new Maharashtra government has announced a loan waiver for farmers who had up to Rs 2 lakh in pending loans between April 1, 2015 and March 31, 2019. Maharashtra thus became possibly the only state to have offered two consecutive farm loan waivers within two-and-a-half years of each other.

Who is eligible?

  • Farmers with outstanding crop loan up to Rs 2 lakh, pending from April 1, 2015 to March 31, 2019.
  • Farmers with more than Rs 2 lakh outstanding are not eligible for the scheme. Also, the scheme has no incentive for farmers who are regular in their repayments.
  • Families with more than one loan account are eligible for waiver in each one of their accounts.

Background:

To help the farm sector, state governments have time and again announced loan waiver schemes. Back in 2008-09, the then UPA government at the Centre had announced a loan waiver scheme for the entire country. States like Madhya Pradesh, Chhattisgarh and others have announced similar schemes in the recent past.

Drawbacks of loan waivers:

  • Firstly, it covers only a tiny fraction of farmers. The loan waiver as a concept excludes most of the farm households in dire need of relief and includes some who do not deserve such relief on economic grounds.
  • Second, it provides only a partial relief to the indebted farmers as about half of the institutional borrowing of a cultivator is for non-farm purposes.
  • Third, in many cases, one household has multiple loanseither from different sources or in the name of different family members, which entitles it to multiple loan waiving.
  • Fourth, loan waiving excludes agricultural labourerswho are even weaker than cultivators in bearing the consequences of economic distress.
  • Fifth, it severely erodes the credit culture, with dire long-run consequences to the banking business.
  • Sixth, the scheme is prone to serious exclusion and inclusion errors, as evidenced by the Comptroller and Auditor General’s (CAG) findings in the Agricultural Debt Waiver and Debt Relief Scheme, 2008.
  • Lastly, schemes have serious implications for other developmental expenditure, having a much larger multiplier effect on the economy.

Way ahead:

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.

What needs to be done?

Proper identification: For providing immediate relief to the needy farmers, a more inclusive alternative approach is to identify the vulnerable farmers based on certain criteria and give an equal amount as financial relief to the vulnerable and distressed families.

Enhance non- farm income: The sustainable solution to indebtedness and agrarian distress is to raise income from agricultural activities and enhance access to non-farm sources of income. The low scale of farms necessitates that some cultivators move from agriculture to non-farm jobs.

Improved technology, expansion of irrigation coverage, and crop diversification towards high-value crops are appropriate measures for raising productivity and farmers’ income. All these require more public funding and support.

Observations made by RBI:

As per RBI, loan waivers not only inhibit investment in the farm sector but put pressure on the fiscal of states which undertake farm loan waiver.

In every state election during the last five years, loan waiver promise made by one political party or other. Also, loan waivers, as the RBI has repeatedly argued, vitiate the credit culture, and stress the budgets of the waiving state or central government.

Sources: the Hindu.