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Farm Loan Waiver: Good or Bad?

Apr 10, 2017 15:23 IST

Indian FarmersRecently there has been news of Farm Loan Waiver in India. The Madras High Court gave the verdict that all farmer loans from cooperative banks should be waived off. The newly formed BJP government in UP announced a Rs 30,729 crore scheme waiving crop loans up to Rs 1 lakh for small and medium farmers. Apart from this, Rs 5,630 crore was allocated for writing off bad loans of around seven lakh farmers, which had eventually become NPAs for banks.  Along with these two incidences, Maharashtra government is also pondering over the demand of farmer loan waiver.

Why was it needed to Waive off the Farmer’s Loans?

There have been chronic debt problems with the farmers in India. It is argued that farmers were not able to invest because of debt overhang. The agriculture sector actually needs government support.
The data suggest the farmers are undergoing through very stressful situations as 9,000 farmers have taken their lives in Maharashtra alone in the three years since 2014. Similar scenarios are said to have happened in other states.  
Some surveys and agricultural censuses show that there is excessive pressure on land, with unabated fragmentation leading to decreasing sizes of average landholdings.
Costs of inputs have been increasing, along with the reduction in the prices of agricultural produce in real terms.  Apart from it, climate change is causing to frequent crop failures and farming is becoming a loss-incurring business.
The National Sample Survey Offices’s 59th survey showed t that 40% of farmers said they disliked farming and would quit if given a chance.
All the factors made it necessary that farmers in India urgently need some immediate assistance from the government.

Loan Waivers in Past

The government led by V. P. Singh offered an agricultural debt relief program of up to Rs10,000 for each borrower In 1990.
In February 2008, the UPA government formulated a proposal on waiving farm loans. It incorporated the proposal in that year’s Budget. The proposal had been discussed at the highest level politically. Finally, in the 2008-09 Budget, then Finance Minister P Chidambaram announced a full waiver of dues up to March 31, 2007, for 3 Crore small and marginal farmers.
It was a one-time settlement scheme for all others, with a 25% rebate thrown in. The value of the loan waiver was pegged at Rs 50,000 crore; that of the settlement scheme at Rs 10,000 crore.
In Andhra Pradesh and Telangana, two separate regional parties came to power in 2014 on the promise of a loan waiver.

Who Needs Loan Waiver?

In India, still, not all farmers are keen for a debt bailout. High levels of household debts have been identified as a significant cause of farmers’ distress in India. Approximately 52% of India’s 90 million agricultural households are indebted.
The debt relief program has been failed to provide required help to landless farm workers who don’t have access to bank loans and some small farmers that depend on money lenders.
In 2013, the chief auditor in its report on the 2008 loan waiver program found cases in which deserving small farmers were neglected while ineligible farmers were favored.
Some agricultural experts think that loan waivers should be used only when farmers have no other way of getting credit for their next crop as farm debt waiver is not a permanent solution to farmers’ problems.

Criticism

The critics of Farmer's loan waiver argue that expenditure on loan waivers will eventually reduce the fiscal space for public expenditure in agriculture.
India is in need of massive investment in areas such as water conservation, irrigation, better storage facilities, agricultural research and market connectivity.
The agricultural problems in Indian are structural in nature. These problems demand long-term solutions. In this way, loan waivers will only end up complicating the problem.
And, the idea of loan waiver smacks of political populism. And in the past too, the Indian economy has suffered a lot due to competitive populism. It’s time that the governments should address the real issues.
Apart from above reasons, farm waivers will increase the budget deficits of federal and state governments and escalate inflation.
In 2014, former RBI governor Raghuram Rajan said such programs ultimately constrained credit flow to farmers. The waivers also disrupt credit discipline among borrowers.

Conclusion

The farm loan waiver would only alleviate the debt problems of the farmers. It cannot be considered a permanent solution for the agricultural problems in India. The pioneer of the green revolution in India M S Swaminathan summed up the Indian agriculture crisis when he said that a Punjab farmer, which was the heartland of the green revolution, with an average of 3.79 hectares, gets less than the starting salary of a class-four employee. This explains what kind of problems and stresses are being faced by medium and small farmers in India. So both center and states governments must come out with a deep- rooted structural policies for farmers instead of just waving of their debts.

Is this article important for exams ? Yes10 People Agreed

DISCLAIMER: JPL and its affiliates shall have no liability for any views, thoughts and comments expressed on this article.

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