In recent months there has been a series of farm loan waivers announced by various state governments. The increasing spate of farmer suicides resulting from crop failure, droughts, insufficient market demand, remunerative prices, etc has led various governments to adopt loan waiver measures. It began with the Uttar Pradesh Chief Minister Yogi Adityanath announcing his decision to waive off farm loans to the tune of Rs 36,359 crores in keeping with line, the party manifesto. Since then it has spread like a wild fire to other states such as Maharashtra and Punjab which have announced similar farm loan waivers amounting to Rs 34,000 crores and Rs 10,000 crores with Haryana, Gujarat, Madhya Pradesh, Rajasthan and Karnataka, among other States in the pipeline.
There is no denying that majority of the population depends on agriculture for its livelihood and the government has to provide support to the farmers in the form of loan waivers so that they are not forced to quit agriculture in search of opportunities elsewhere. Also, many farmers borrow from unofficial money lenders which lead them to a vicious cycle of a debt trap. So in a way, the farm loan waiver scheme will lead them to borrow from banks rather than unofficial money lenders.
However, the major argument against farm loan waivers is that they impact credit discipline among borrowers and affects state finances. Borrowers willfully default on their loans in the hope that they would get a waiver from the government leading to a situation of moral hazard. This impacts bank balance sheets and also their long term growth. It also leads to a pressure on the government to increase its borrowings since it has to pay for more and more loan waivers and as a result it crowds out private borrowings resulting in no gains for the economy. The farm loan waivers are primarily intended to benefit small and marginal farmers with land holdings upto 1 hectare but it has been observed that it has mostly benefitted medium and large farmers who have access to banks and other formal lending institutions. Bankers such as RBI governor Urjit Patel and Arundhati Bhattacharya of SBI have already denounced it. Even several studies such as Xavier Giné and Martin Kanz, World Bank (2014), Indian Statistical Institute (2013) and ICRIER (2015) have suggested farm loan waivers as an unsustainable measure of helping farmers. A recent Bank of America Merill Lynch (BofA-ML) report has estimated that many states are likely to waive off farm loans to the tune of $40 billion or 2% of national GDP in the run up to the 2019 elections which are grossly imprudent as far as fiscal discipline is concerned. Thus farm loan waivers have become more of a political tool to win elections rather than actually benefiting farmers.
However, there is a counter argument to the narrative given above. Many agriculturists and farmer related groups feel that the government is systematically discriminating against the poor farmers compared to the capitalists. The mainstream economists have long advocated that bad debts for the corporate sector should be waived off but have not supported the farmers in a similar way. According to the public accounts committee of the parliament, the total Nonperforming assets (NPAs) of public sector banks accounts for Rs 6.8 lakhs of which 70 percent belonged to the corporate sector whereas only 1 percent of defaulters are farmers.
Hence the solution to all these problems is to give farmers a higher price for their produce by way of through investments in irrigation, roads, adoption of new technologies and research, better storage facilities and letting them sell their produce outside the APMC mandis which limit their sale. This will lead them to stop seeking undue assistance from the government and help them on a prudent path to fiscal discipline. All these require a long term vision rather than short term fixes as these only complicate the problem. Even agricultural experts such as M S Swaminathan have advocated long term solutions to India’s agrarian problems such as increasing farmers’ income, raising minimum support prices and making it less susceptible to climate change or commodity prices than waving off debts. So the solution lies in envisioning long term solutions that are sustainable rather than the magic wand of short term gains.