Adding to the already grim situation of India’s agricultural sector, recently, a rise has been noted in the agriculture, non-performing assets. While Bank of India tops the list with the highest number, there has been a 9% rise in the agriculture NPAs in the country’s largest bank, State Bank of India. Major banks, such as the RBI are blaming the loan waivers for this condition. In this context, the article investigates the relevance of the loan waiver policy in solving India’s agrarian crisis.
The much-debated policy provides relief to farmers from farm debts, when they are unable to repay the loans due to various reasons, like crop failure, low production due to droughts, floods, etc.
The most common argument given in favour of the policy is the debt hang theory. It states that debt waivers help farmers come out of debt and enables them to make productive investments, but studies have highlighted that farmers tend to make more investments in non-agricultural activities. Consequently, as demonstrated by noted economist Martin Kanz, loan waiver beneficiaries tend to make lower agricultural investments and have less productivity, than similar non-beneficiaries.
On the other hand, a cost-benefit analysis of the policy highlights its economic infeasibility. For instance, a 2018 research by the State Bank of India (SBI), pointed out why loan waivers are the worst solution for rural crisis and can weaken the credit culture. Violating the fiscal discipline, they become a burden on the economy. Instead of contributing to the national growth, they hinder the development process, as the money which could have been used for improving infrastructure, gets used up in waiving loans.
An RBI report also speaks about the ‘moral hazard’ associated with debt waivers, where the borrowers might default strategically in anticipation of waivers. Thus, this policy is not only leading to economic deterioration but also social and ethical issues.
Moreover, this scheme does not benefit all the targeted beneficiaries; it only waives loans taken from formal sources. This creates a gap in the policy’s implementation as not all farmers have access to banks. The small farmers still depend on informal sources to meet their credit needs and thus they do not benefit from the waiver. The 2013 NSSO report shows that out of the 52% indebted agricultural households, only 31% were likely to benefit from the waivers, as only they had borrowed loans from institutional sources.
The scheme also does not cover the landless cultivators. Having no land or fixed income source, banks are often unwilling to grant them loans, and without it, they do not become eligible to receive any benefits from this policy. According to Agricultural Statistics 2017, 144.3 million farm labourers are landless, hence, not entitled to farm loans. Therefore, 54.9% of the agricultural workforce does not benefit from the farm loan waiver policy.
There is a sheer decline in the productivity and profitability in the farm sector, which is further aggravated by the lack of resource allocation. Such conditions have a profound impact on the conditions of small and marginal farmers.
But then why do they remain a prominent policy choice for addressing the farmer issues?
Loan waivers have both an economic and political character. Often, they have been used by political parties to garner support before the assembly elections. As per the economic-times, when one state announces loan waiver, it creates pressure in other states for similar action. As a result of which, almost every state election now leads to a loan waiver.
Telangana’s ‘Rythu Bandhu’ scheme, launched in August last year, has been held by many experts as an alternative to loan waivers policy. Under this investment oriented scheme, farmers receive cash transfers of Rs 4000 per acre, which has now been increased to Rs.5000, each cropping season to make an investment in seeds, fertilizers etc. The scheme aims to address the investment needs of the farmers and has been useful for cultivating farmers. But, the scheme faces a similar limitation like the farm loan-waiver policy.
One-fourth of the sixty-lakh farmers in the state are tenant farmers, who are ineligible for income support, as they do not own land. And as per a study, 75% of farmers’ suicide cases in Telangana, in the last four years, were committed by tenant farmers. Apart from this, a major amount of the funds are pocketed by big landlords, and by those who own land but do not practice farming.
This scheme has garnered national attention and Arvind Subramanian, the former Chief Economic Advisor, has termed it ‘the future of Indian farm policy’. Undoubtedly, direct income and investment support are seen as better, and more effective, policy tools to address farmer conditions, but, it is important to understand the structural causes of the agrarian crisis of the nation. The declining profitability and productivity in the agrarian sector, with a lack of institutional support, and resource allocation, has aggravated the existing crisis.
Clearly, the governments can do better than loan waivers. They have become more of a political gimmick and provide only temporary relief to the farmer’s problem. What India needs is a sustained and long-term investment in the agrarian sector.