Loan Waiver for Farmers – How Much It Will Impact Them

Loan Waiver for Farmers in India and it's Impact

Loan Waiver for Farmers in India and it's Impact

On June 11, 2017, Maharashtra state government made the announcement of waiver of farmers’ loan. The grand announcement was in response to the 10-day protests by farmers in the state and the announcement has helped in restoring peace to the state. However, how far this decision will be implemented is not yet clear. In a similar manner, the Yogi Adityanath-led UP government in April 2017, soon after it came to power, announced that the state government will waive outstanding farmers’ loans till March 31, 2016 . Recently farmers from Tamil Nadu came to Delhi to protest. In the meantime, the RBI Governor has warned against loan waivers. All these have brought the farm loan waive-offs under public attention once again.

A brief idea on farm loans’ waive 
These are crop loans or investment loans taken by farmers to buy equipment. When there is a good harvest, both farmers and banks gain a good profit. But in times of natural calamities or poor monsoon, it becomes a problem for farmers to repay loans. Under such circumstances, the State governments or the Center are forced to offer relief in the form of reduction or complete waiver of loans. This in turn, means that the government takes over the liability of the farmers, and repay the loan amount to the banks.

Waivers are usually selective
Not all types of farm loans are waived off. For example:

  • In 2008, crop loans and investment loans were waived for farmers having less than 2 hectares of land ownership. These are referred as marginal and small farmers. For other farmers, reduction of loan was only 25%.
  • In recent time, the waiver in UP is up to Rs 1 lakh for small and marginal farmers who are in-debts till March 31, 2016.
  • Even in Maharashtra, the waive will be a selective one though nothing has been formally announced as yet.
  • On the other hand, for Tamil Nadu Farmers, the Madras High Court has directed to offer a waiver to all farmers in the state.

Impact of Loan Waiver on Farmers
Agriculture in India is the primary occupation of the country. More than 50% of the country’s population has been engaged in agriculture. But this sector has been facing many problematic issues like as follows:

  • Fragmented land holding
  • Depleting level of water table
  • Poor soil quality
  • Increase in input costs
  • Low productivity
  • Monsoon irregularities and vagaries

With all these problems, the output prices may not be highly profitable. Farmers are often compelled to take loans to manage expenses. While big farmers can opt for bank loans, the small farmers, who are in large numbers, are not eligible for bank credit and hence they borrow at extremely high interest rates from private sources. With cumulative agricultural problems, coupled with erratic monsoon and crop failures, the debts of farmers increases. This is one prime reason for increasing suicide rates among the debt-ridden farmers in the country. Under such situations, loan waive is the urgent need.

Drawback of loan waive

However, loan waive also has its drawbacks:

  • In the expectation of a waiver, even those farmers who can afford to pay back the loan may not repay it. The very concept of credit discipline will be looked down upon and many banks may be reluctant to lend to farmers in the future.
  • Loan waive  brings about a sharp dent in the finances of the government.
  • Loan waivers also cost tax payers. For example, as per the International Council for Research on International Economic Relations , it was estimated that about ₹525 billion was spent on the loan waiver in 2008.
  • Loan waive has also become a tactic for government to win elections in which the political parties and big farmers benefit while the small and marginal farmers remain in the same condition.
  • Also, the selective loan waive is also not been properly defined. Farmers are still protesting against UP government over the criteria for selecting farmers eligible for a loan waiver.

Effective measures
Loan waivers no doubt provide some relief to farmers but the long-term effectiveness of such a waive is not yet been ascertained. While loan waive can provide temporary relief to farmers, yet long-term effective measures are more required for making agriculture sustainable. Some measures that can be adopted by State Governments and NGOs and other voluntary individuals and organizations are :

  • Reducing inefficiencies
  • Reducing costs
  • Increasing income
  • Providing protection through insurance schemes

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