Farm Loan Waiver: Votes and Economic Impact

Published : Jan 01, 2019 11:03 am | By: M D Sridharan

Every political party talk at length about farmers’ distress. As political parties vie with each other and announce farm loans waiver to woo the peasants to increase their vote share, it adds tremendous burden on the state exchequer.

Election campaigns and promises are inseparable. Whenever the country is gripped in the election fever- bet it assembly elections are general elections, Indian political calls will turn in to “philanthropists”. They will be more generous in announcing an array of “freebies’ for the poor. There is also a constant factor that the politicians desperate for votes will address at the time of elections:  The farmers’ distress. Our leaders not only talk about the farmer’s plight during elections, but also shower them promises to wipe out their debts. There is absolutely not a single political party in the country which has not promised the farmers to waive their farm loans, if voted to power.

In a country dominated by rural economy, the term “farm loan waiver” has become the powerful political buzzword that woos the peasants cutting across caste, religion and party lines. Also, it provides a great opportunity for the political class to easily get connected with the peasants and they temporarily act as their true custodians.

In fact the election promise of a farm loan waiver by the Congress in the recently concluded elections in Hindi heartland states of Madhya Pradesh, Rajasthan and Chhattisgarh has struck an emotional chord with the farmers and turned the tables against the BJP which lost all the three states.

Within hours of taking oath Madhya Pradesh Chief Minister Kamal Nath wrote off farm loans of up to Rs 2 lakh pending till March 31, 2018, amounting to Rs 18,000 crore. Chhattisgarh Chief Minister Bhupesh Baghel too announced farm loan waiver amounting to Rs 6100 crores, Rajasthan Chief Minister Ashok Gehlot also followed suit and announced a waiver of short-term loans taken by farmers from cooperative banks and loans of up to Rs 2 lakh from other banks. The waiver would cost Rajasthan Rs 18,000 crore.

The populist announcements by the Congress governments, has also prompted some BJP state governments to reach out to the rural masses for future electoral gains. The BJP government in Assam announced a farm loan waiver of Rs 600 crore, while the Gujarat government announced a decision to waive electricity bills of villagers amounting Rs 650 crore. In all about seven state governments have promised to write off farm loans worth a whopping Rs 1.8 lakh crore.

Last year, the Punjab government and the Karnataka  government also announced farm loan waivers of Rs 10,000 crore and Rs.8,165 crore respectively.  In April 2017, within a month of taking charge as Uttar Pradesh Chief Minister, Yogi Adityanath announced Rs 36,359-crore loan relief. Devendra Fadnavis  followed suit in Maharashtra in June last year and announced a waiver of Rs 30,500 crore, which has since risen to Rs 34,500 crore

Further jubilant over the recent electoral victories Congress president Rahul Gandhi has declared, that he will not let Prime Minister Narendra Modi sleep until all farm loans are waived. He also announced that “If the Modi government does not waive farm loans we guarantee to waive farm loans if voted to power in 2019.”

Strain on State Governments

There has been a lot of hue and cry over the farm loans waivers announced time again by various governments. Whether good or bad, farm loan waiver has become a reality today. More importantly, a loan waiver frees the borrower completely from liability to pay and becomes a direct burden on State finances.

As the practice of  farm loan waiver has remained as one of  the main election pitches  in the last couple of decades, farmers also know it  very well that their  debts will be  written off and they need not struggle hard to repay their loans.  As a result, increasingly the farmers too have developed a habit of wilfully defaulting on loans.

But, in terms of providing actual relief to distressed farmers, the question remains is that for how long the states can afford such huge financial strains? On the other hand indeed there are some inherent difficulties in implementing the waiver schemes.  In many states, such schemes have not been fully executed despite commencing on a grand note eventually been substantially watered down.

For example, Congress ruled Punjab government, had promised to completely waive farm loans as one of the poll promises in 2017 elections. After coming to power, Chief Minister Captain Amarinder Singh had declared that his government would take over the debt of every farmer, totalling Rs 67,000 crore and negotiate with banks towards this objective.

As against that promise, however, the Punjab government could manage to waive only Rs 1,750 crore of loans up to an amount of Rs 2 lakh each availed by marginal farmers (owning less than 2.5 acres) from cooperative banks. The state is only now about to launch a second round of waiver covering loans worth Rs 1,771 crore from commercial banks, which is again restricted only to marginal farmers. Small farmers with holdings between 2.5 and 5 acres will have to wait for their turn, probably till the middle of next year.

The reasons are obvious as the state’s borrowing ability has been stretched beyond limits to finance any meaningful loan waivers. In Rajasthan also waived loans up to Rs 2 lakh only in the case of “economically distressed” farmers who have defaulted Loans owed to nationalised and regional rural banks.

The fiscal strain of farm loan waivers on the States is worrisome. As per RBI, the gross fiscal deficit (GFD) of States rose to 3.1 per cent of GDP in 2017-18, breaching the threshold of 3 per cent GFD/GSDP ratio recommended by the Finance Commission.

Farm debt waivers announced by five large States could widen the fiscal deficit of the States by ?1,07,700 crore this fiscal. It could, however, be argued that loan waivers are no different from bad loans, and NPAs have been large in other sectors too.

According to RBI data on Non-Performing Assets (NPAs) as on December 31, 2017, the industrial sector accounted for 20.41 per cent of the gross NPAs of scheduled commercial banks, whilst the agriculture sector accounted for a modest 6.53 per cent.

Further, a study done by Niti  Aayog revealed shocking details that not all farm loans are taken for agricultural purposes. In some of the states, more than three-fourth of crop loans is used for consumption purpose and not for agriculture purpose. That is why NITI Aayog has been opposing farm loan waivers.  Also, 50 per cent of farmers do not have any outstanding loans from institutional sources. Despite spending lakhs and crores of rupees, not even half of the farmers are benefiting. In some of the states, not even 25 per cent of farmers avail institutional credit.

Nightmare for Banks

There has been two national farm loan waivers in1990 and in 2008. In 2014, Telangana and Andhra Pradesh announced waivers. Tamil Nadu joined in 2016.

An RBI study of the loan waiver revealed that it can have a dampening effect on rural credit institutions.  Farm loan waivers in states may put squeeze on lending and could cause a lending freeze for agriculture in the coming quarter as banks stare at a jump in non-performing assets and disruption in repayment cycle

As much as Rs 1.47 lakh crore of farm loans are outstanding in Madhya Pradesh, Rajasthan and Chhattisgarh, which have announced waivers, according to government data.

Maharashtra, Uttar Pradesh and Punjab announced waivers in 2017, which are under implementation. Karnataka announced a waiver earlier this year. These waivers add up to Rs 80,000 crore. With these three states joining, the amount could rise to nearly Rs 1.5 lakh crore. Farm NPAs usually rise sharply to nearly Rs 1.5 lakh crore. Farm NPAs usually rise sharply soon after a loan waiver is announced, as farmers stop repayments. The banks receive money from the government after a considerable gap as scheme details are framed and processes worked out. 

As per RBI data, UP’s farm-loan waiver was at ?36,000 crore – around 2.5 per cent of its Gross State Domestic Product (GSDP), while in Maharashtra it was at ?34,000 crore. Punjab provided ?1,500 crore in the State budget for 2017-18 for loan waiver, while Karnataka has announced a waiver amounting to ?8,100 crore for farmers availing loans from cooperative banks. Practically speaking if banks don’t get the repayment of loans, where will the  funds to lend for the next cycle come from?

The loan-waiver promise amount to ?40,000-90,000 crore approximately. At a time when inflation and fiscal deficit are major concerns in the backdrop of stress on other segments of banks loans, loan waivers can only worsen the situation for already beleaguered banks.

Economists and the RBI have also been critical of such moves.Economists warn that the biggest threat that farm loan waivers hold for the economy.  Economists caution that farm loans waivers would widen a fiscal deficit the government has aimed to cap at 3.3 per cent of its gross domestic product (GDP), or Rs 6.24 lakh crore.

The loan waiver also risks deepening the malaise at public sector banks saddled with most of India's $150 billion in stressed loans. If the government finds very limited fiscal space, it could go for loan waivers only in a few geographies that have suffered extreme weather conditions, sources and analysts said.

States, typically, stagger payments over four to five years. This puts pressure on banks’ books, forcing them to put a lending squeeze. Also, defaulters will get edged out as they would be ineligible for fresh loans. 
Banks have to provide for these NPAs, which reduces their lending capacity. Besides, there are apprehensions of a rise in loan defaults spreading to other states as expectations rise for such a waiver there as well

The NPAs in total outstanding agricultural advances touched 23-30 per cent across States. Bankers are expecting a major announcement in the ensuing Union Budget about waiver of certain categories of farm loans and are gearing up to face it.

Although farm loan waivers are a populist move, debt write-offs help only relatively well-off farmers with larger plots of land. Since a majority of farmers in the country fall in the category of marginal farmers – those with less than 2 hectares of landholding – any offer to waive farm loans is going to bypass them. This is supported by facts that only 15% of the marginal farmers have access to formal credit. India's small farmers - 80 per cent of the total - often cannot borrow from banks and turn instead to local money lenders who charge exorbitant interest of 25-50 per cent.

Need of the hour

As the trend of farm loan waivers has gripped the country, the debate often emerges over that indeed are farm loans waivers the only way to help farmers? Past experiences suggest that the Farm-loan waivers do little to resolve the agriculture crisis. Though it is a fact that indeed small farmers are getting a temporary relief, the after-effects of loan waivers have indeed affected the economy on the whole. Several independent surveys done by the government as well as the private agencies have   found farmers turning deliberate defaulters in the hope that their loans will be waived sooner or later.

In 2008 UPA government announced mega loan waiver of Rs 71,680 crore. It amounted to 20 per cent of total outstanding loans to agriculture in 2008, and actual disbursement was just Rs 52,516 crore over a period of four years, as per the report of the CAG on Implementation of Agricultural Debt Waiver and Debt Relief Scheme (2013).

Already, pan-India loan waiver is likely to cost anywhere between Rs 4 and 5 lakh crore, including states that have waived farm loans since 2017. In this context, it may be noted that in September 2018, total outstanding credit from scheduled commercial banks (SCBs), including Regional Rural Banks (RRBs), to the agriculture and allied sector was about Rs 10.5 lakh crore. If one adds to it the share of Primary Agricultural Societies (PACs), the total outstanding credit to agriculture currently is likely to be around Rs 12-13 lakh crore. If all of this is waived off, as the rhetoric of loan waivers goes, it will simply blow up the budget. It is not feasible

It may be noted that institutional credit comprises about 64 per cent of total credit taken by all farmers, the remaining 36 per cent coming from non-institutional sources and it is the large farmers who take a larger proportion of their credit from institutional sources.

The marginal farmers with holdings of less than one hectare, who constitute 68.5 per cent of the farmers, actually take more than half of their loans from non-institutional sources at interest rates that range from 24-36 per cent. Studies have shown that the reduction in bank credit following waivers forces farmers to approach informal sector lenders, which increases indebtedness as such loans are expensive. 

Loan waivers are poll bait. Economists and international monetary watchdogs, describe the phenomenon of Farm loan waiver as fiscal brazenness Economists point out that farm loan waiver is just an atonement for not reforming agriculture and strictly following restrictive trade and marketing policies. What is needed is a better method to support farmers through a structured and stable income support policy instead of the haphazard manner of loan waivers.

Alternatively, waiving only a portion of the loan instead of placing a cap on the quantum of loan waiver will be an improvement towards averting moral hazards. Also, altering the crop insurance schemes based on the crops in tune with the weather can also alleviate farmers’ distress to an extent. State governments also need to look at the restructuring the MSPs will help to stabilise farmer incomes and provide greater financial relief.

Niti Aayog even suggests providing an upfront subsidy per acre of land to farmers through direct benefit transfer instead of providing separate subsidies for fertilisers, electricity and crop insurance, better infrastructure and technology-enabled considered.

Other than writing off crop loans, the government would also try to step up the purchases of farmers' produce. The government can provide loans by inversely relating to their holding size, making it more pro-small holders. Farms can be geo-tagged to ensure that only those farmers get benefits who are cultivating land. Land records will have to be upgraded to include tenants.

The Centre should also include fertiliser subsidy into this and encourage states to transfer their power subsidy through this platform based on per hectare basis. Such a policy can reach the largest number of farmers, be more equitable, the least market distorting, and predictable. Besides, striking the right balance between consumers and farmers is the need of the hour.

While, the economists stress the government to address farm distress through other potent alternatives to loan waivers, as the BJP and Prime Minister Modi is looking for a second term in the office, it remains to be seen how Modi government will handle the issue ahead of the Lok Sabha elections.  Also, the fact remains that after the loss of Hindi heartland states, BJP cannot turn a blind eye towards some of the stark realities of rural India and just cannot ignore the potential election tool called “Farm Loan Waiver”.

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