Under the Prevailing Agrarian Scenario, Bank Loans of all farmers should be Waived Off
We, the people of India have completed 70 years of our independence from foreign rule. In these 70 years we witnessed, unlike in any other post-colonial country of the world a jump from Agricultural Revolution to Technological Revolution. We missed the Industrial Revolution in between. Its repercussions are that tremendous amount of surplus labour from agriculture sector could not be absorbed in labour intensive industrial units and hence the root cause of today’s agrarian crisis.
This complex phenomenon along with some faulty agricultural policies adopted by the successive governments in the recent past has led to a situation which we are witnessing today. Farmers from regions which hitherto were considered as near-to prosperous have taken to streets and are demanding relief, one demand which has become topic of national discussion amongst general public in general and experts in particular. The pros and cons of farm loan waiver are still being discussed while various state governments have announced farm loan waivers in their respective states.
Let us not discuss the general public’s arguments but almost all the agricultural economic experts have written or spoken against the farm-loan waivers as a policy instrument while even dubbing it as a mere vote-bank political stunt. Their primary concern is with the implementation of M. S. Swaminathan report on farmers which has recommended, apart from many other things, to fix Minimum Support Price (MSP) at least 50% more than the weighted average cost of production.
The idea is welcome. Infact it is truly an agricultural game changer and is surely going benefit the farmers. But why not waive off the loans of all the farmers in the light of prevailing agrarian scenario which has taken an unprecedent shape in independent India. Why not take all the corrective measures and also waive all the farm loans and start the script of rural indebtness all over again.
Yes, it is a fact that loan waiver is not the sole panacea of farmers’ perennial problems in our country. It is also a fact that farmers are selling below their cost and no business can sustain itself if it continues to do so for a considerable period of time. Yes we have reached a tipping point. P. Sainath, the renowned rural expert has said that waiving of farm loans is like “Trying to mop the floor with all the taps open and running. Even RBI Governor has associated dangers of moral hazards with farm loan waiver and of fiscal rectitude in not giving the waivers. These arguments have been made while the farmers were being beaten, fired upon and jailed.
RBI Governor is not factually incorrect and P. Sainath like other experts, is demanding more serious steps to be taken by the Government to improve the conditions of our farmers. He has gone on record to even call for a special Parliament Session to discuss farmers’ distress.
Yes, all the taps are opened but rural indebtness is one of the taps which is discharging highest amount of water (read blood, in the form of farmer suicide) and hence foremost duty of the Government is to close this tap first and then move on to close other taps i.e., take steps as being demanded by agro-economic experts.
Coming to the arguments of moral hazard, vote bank politics and fiscal rectitude, let us take them up one by one.
As per the Government of India’s Budget 2016-17, the total amount of revenue forgone on direct and indirect taxes for the fiscal year 2016-17 stood at 3,18,348 crore and for previous three financial years it was just over 17 lakh crore. This revenue forgone is rightly not considered at par with tax waiver. Experts say that such tax incentives are necessary to start or stimulate economic activities in certain areas which further generate employment and income. I am not against the practice of revenue forgone but by not applying the same intellectual argument in the case of a farmer committing suicide for not being able to pay back a debt of 10,000 raises some morally paradoxical questions on our wisdom. Why is there no moral hazard in not incarcerating the so-called wilful defaulters. It is a matter of national shame on our system that wilful defaulters of some thousand crore rupees are roaming free while crores of farmers owing some thousands of rupees are resorting to poison to end their insurmountable suffering. Consider this ironical fact : The Uttar Pradesh Government’s farm loan waiver will cost the state just over 36,000 crore while benefiting more than 2 crore farmers. In stark contrast this amount is less than the amount owed by top 10 wilful defaulters of our country. 10 people and 2 crore farmers : and then our so called experts talk of moral hazards.
Even if, from politicians perspective the issue involves vote-bank politics, then also, when seen from the pathetic predicament of ordinary farmers’ perspective who are on the brink of losing their lives, the idea of waiving farm loan weighs heavier on politicians’ narrow mindedness.
As far as putting fiscal deficit numbers above the priority in drought ravaged year of agrarian crises is concerned, it is similar to paint one side-wall of a building while if burning and saying, as we paint it, “look how it gleams”.
Dwight E. Eisenhower, former US President once said, “Farming looks mighty easy when your plough is a pencil and you are a thousand miles from the field”. Experts can easily admonish farm loan waivers as mere political gimmicks or morally hazardous but in my view if such step can serve as a succour in saving life of even one farmer, I will support such one-off step.
Yes, long-term remedy lies in implementation of M. S. Swaminathan’s report. Yes, we need a National Agricultural Policy. Yes, there is a need for an integrated approach, one that addresses source sustainability land use management, agricultural strategies, demand management, distribution and pricing of water etc. Yes, the need of the hour is to make agriculture a professional activity and considered as a profit and employment generating activity rather than disparaging it as the poor man’s work. But above else, to the categorical question as to whether farm loan waiver be made, I for one, make a categorical remark. ‘Yes’.
“Indebtedness of farmers is a symptom and not the root cause of the farm crisis.”
Recently the country witnessed a series of farm loan waivers by different states, Uttar Pradesh being the first among the three states to announce the waiver followed by Maharashtra and Punjab. While this decision in UP and Punjab came as a result of fulfilment of pre-poll promise made to the voters by the political parties (BJP in UP and INC in Punjab) voted to power, in Maharashtra it was announced after the farmers intensified their protests in favour of their demand for loan waiver.
Farmers form a considerable vote bank in our country as more than half of the population still earn its livelihood through direct or indirect engagement with agriculture. This move by the governments at first instance seems to be a populist one in an attempt to attract the voters and to secure their position among the voters. Certainly, it helped the parties electorally .
But will the initiative benefit farmers or not ? What would be the impact on the economy in general and agriculture and farmers in particular ? These are some of the questions that need attention. The farm loan waiver will have significant impact on some key sectors of the economy.
It will hit the credit system in the country by distorting the credit culture. It blunts the incentives for future borrowers to repay. In other words, waivers engender the problem of moral hazard. It gives an incentive to farmers to wilfully default on their bank loans in expectation of more such waivers in pipeline. It also discourages the borrowers who repay their debts honestly in expectation of a future debt relief announcement.
The onset of such trends is quite predictable from the various studies undertaken in light of the previous waivers that suggest that the agricultural NPA’s of banks have sharply risen after the roll out of such schemes aimed at waiving the outstanding loans of farmers.
In 2008, erstwhile UPA govt. announced the agricultural debt waiver and debt relief scheme (ADWDRS) seeking to address the problem of indebtedness and difficulties faced by farmers particularly by small and marginal farmers. Under this, the bank loans of small and marginal farmers were fully written off while the others were given partial relief.
According to a paper published by Indian Statistical Institute in 2013 there was deterioration in the repayment of loans after the loan waiver of 2008. It also stated that farmers who had not defaulted on their loans before took longer to repay their loans.
A 2015 ICRIER (Indian Council for Research on International Economic Relations) research paper states that the massive write off of loans in 2008 caused a threefold rise in agricultural NPAs of commercial banks.
Apart from hurting banking system, the loan waiver will also harm the farmers in the long run. With the increased risk of non-repayment of loans triggered by loan waiver schemes, the banks will be hesitant to extend credit to farmers which would force the farmers to resort to non-institutional sources of loans (or credit) at exceptionally high rates of i nterest. In case of non-availability of finance, the farmers would not be able to procure required agriculture inputs which will further deteriorate their condition.
The farm loan waiver will have serious macro-economic repercussions as well. Many experts on economic issues have showed their concern regarding the potential impact of waiver on financial stability of states. In August 2017 monetary policy committee of RBI also pointed out that massive loan waivers can affect the finances of states and lead to inflation.
The debt waiver package announced by the three states (UP, Punjab, Maharashtra) amounts to around 77,000 crore which is estimated at 0·5% of India’s 2016-17 GDP. Writing off such a huge amount will necessarily strain the finances of these states.
It will deteriorate these states’ debt to GDP ratio which will impact the fiscal discipline of states. It will increase the aggregate interest payment burden of states which is already substantial. Interest payments on debt forms the highest part of the budgetary expenditure of states, as high as 21%.
The farm loan waiver is used as a gimmick by political parties and governments to woo farmers. As more and more states go into poll by the end of 2017, in 2018 and general elections are scheduled in 2019, there is possibility that more such waivers will be announced in near future which will jeoparadize India’s stated objective of lowering its total public debt (centre and states combined) to 60% of its GDP by 2023.
The impact on finances of governments could be justified had these waivers provided meaningful relief to India’s distressed rural economy and prevented the aggrieved farmers from committing suicide. The exercise of loan waiver is not a new phenomenon and has been undertaken multiple number of times at national and state level. Farm loan waiver scheme of 1990 was first such decision. Then, in 2008 the then govt. announced the waiver just before the 2009 general elections with an ulterior motive of wooing the farmers all over the country and reaping political benefit. In 2014, Andhra Pradesh government also announced the similar decision. All these initiatives provided only short term relief to farmers.
Indebtedness of farmers is largely the result of the fact that agriculture is increasingly becoming a non-profit profession. It would not be an exaggeration to say that agriculture in India is undergoing a crisis. Although there is not any significant impact on the farm yield yet the condition of farmers is worsening with every year passing. Farmers in India are exposed to multiple risks from frequent crop failures and production uncertainly due to unpredictable weather conditions to marketing risks of collapse of prices due to huge production. They are not fully protected against all these risks.
Low income of agricultural households is the preeminent cause of farmers defaulting on loans. Their earning is mainly constrained by many unaddressed and unsettled structural problems. According to NSSO’s 70th round agricultural census 2013-14 data, the average monthly income of an agricultural household is 6426 which is way less than the per capita income of the country. With this meagre monthly income, how can the farmers be expected to repay their loans smoothly.
The loan waiver can give farmers short term relief but what will happen thereafter. If the condition of agriculture sector of country remains the same, then farmers would again incur debt and have to live in hope that government will again come to their rescue. What is more important than loan waivers is to empower the farmers so that they do not get trapped in the vicious cycle of debt as described by the pioneer of agriculture revolution in India, M. S. Swaminathan.
According to the statistics of agricultural census 2013-14, over 50% of the total agricultural households in the country are carrying the burden of outstanding debt which amounts to 42,000 per household. The face of the agriculture sector in country cannot be transformed fortnightly. It calls for a comprehensive reform process and sincere efforts in a holistic manner on the part of the system and government.
The recommendations of National Commission on farmers constituted in 2004 suggests comprehensive measures to address the problems of farmers. The agrarian community has been demanding the implementation of recommendations of the Commission. But no government has yet decided on it. The plight of farmers is a long unsettled issue in India that can be resolved only by adopting trans formative measures in agriculture sector and not by short term reliefs like loan waiver on different intervals of time