Is Loan-Waiver For Farmers In India Enough To Fix The Agricultural Woes?

Farmers loan wave off

Farmers loan wave off

India saw the farmers of Maharashtra and Madhya Pradesh going on a strike, which even turned violent. One of the main demands of the farmers is loan waiver. The farmers want to be eligible to apply for fresh credit and that is possible only if the loans that they have taken till now is completely waived off.

The new BJP government of Uttar Pradesh with Yogi Adityanath at the helm opened up a Pandora’s box when it announced a Rs 30,729 crore scheme to waive crop loans up to Rs 1 lakh of small and marginal farmers in the state, thus fulfilling the mandate of its poll.

The loan waivers will not only prove as a huge drain on the exchequer but will also be a blow to the much needed infrastructure in the agricultural sector as well as the hope of doubling farm income by 2022 through transformation of Indian agriculture. While the Chief Ministers of Madhya Pradesh and Maharashtra, Shivraj Singh Chouhan and Devendra Fadnavis respectively, are aware of the adverse consequences of loan waiver, they have had to perforce relent to the demands of the agitating farmers.

Loan waiver makes sense only in the short-run and that too for the political parties on the lookout for vote banks. In reality, waiver of loan would adversely affect the Indian economy in the following ways:

  • According to Arundhati Bhattacharya, the head of the country’s largest lender the State Bank of India (SBI), loan waivers affect credit discipline. Her predecessor Pratip Chaudhuri as well as former Reserve Bank of India governor Raghuram Rajan had also flagged the issue, as repeated loan waivers affect credit pricing and disrupt the credit market.
  • In simple terms, credit is defined as trust as well as the promise to “buy now and pay later” under designated “terms” for goods or services. Discipline is the strict and regular moral training. Thus, credit discipline can be defined as “strict and regular control on promise/s to pay, within designated/ agreed terms.”
  • Credit discipline is important as it affects the Credit Risk Score. Credit Risk Score is the rating system which is implemented by the lenders, credit issuers, banks, financing and financial institutions to let them know credit risk level to help them make sound credit decisions when there is an application by an individual.
  • While loan waivers will help farmers in India to apply for fresh credit, their Credit Score List will act as a deterrent and they will be unable to receive fresh credit. Financial institutions will move away from districts with greater exposure to the loan waiver and become selective in extending credit thus further affecting the agricultural output in the medium to long run.
  • Xavier Giné and Martin Kanz of the World Bank have shown in their study—The Economic Effects Of A Borrower Bailout: Evidence From An Emerging Market that “There is no evidence of greater investment, consumption or positive labor market outcomes in areas where debt relief led to a significant reduction of household debt. It is not surprising that, in the case of India, government efforts to stimulate the real economy through debt relief were largely in vain given that the bailout also led lenders to reallocate credit away from districts with high program exposure.”

Key To Long-time Relief For The Farmers

  •  Price stabilisation is the vital aspect for giving long-term relief to farmers. Market reforms through the creating of new markets which are easily accessible to the farmers, especially the small and marginal farmers, will work towards securing the future far more effectively than loan waivers.
  • Also needed is better anticipation of output and information systems, so that the government knows what it needs to import and farmers know what to sow.
  • Public investment in agriculture is the key to short-term and long-term measures for giving relief to farmers under debt in India. The increase in agricultural spending in the budget of the fiscal year 2017-18 has been minimal and this is certainly affecting the agricultural sector.  Basic infrastructure like irrigation and warehousing facilities which will help the farmers in the long-run has taken a hit and thus disturbing the stability of the agricultural sector.