The Big Picture Sumary – Farm Loan Waivers

Reserve Bank of India Governor Urjit Patel has sounded the alarm on state governments waiving farm loans and has called for a consensus to do away with them to avoid damaging the national balance sheet. Uttar Pradesh Chief Minister Yogi Adityanath recently announced a 36,000 crore rupees farm loan waiver which could trigger similar decisions by the Punjab and Maharashtra governments. Responding to a question on whether there were any concerns on  loan waivers, Patel said that they entail transfers from taxpayers to borrowers.

Issues related to agriculture:

  1. Fragmented land holding
  2. Depletion of water table level
  3. Deteriorating soil quality
  4. Rising input costs and less output
  5. Low productivity
  6. Vagaries of monsoon

Due to these reasons, often farmers are unable to manage their expenses and have to borrow money from moneylenders at extremely high rates as they are not eligible for bank credit. Indebtedness is a major reason for farmer suicides in the country.

Pros and Cons of farm loan waivers:

This idea seems to be bad politics as well as bad economics because it may win the political party some votes but is not sustainable in the long run. Waiver of loan is a plain action where the credit climate is hampered. It will be counter productive not only for the state but for the entire credit market.

It is a sub-optimal policy. A good policy would have been a set of things which were suggested by the Swaminathan Committee Report. On an average, the income of farmers is so low that their daily survival becomes a problem. Farm loan waivers is becoming a necessity now because these deep rooted problems are not being addressed related to farmers and their sufferings cannot be ignored. As per the NSSO’s 59th survey, about 40% of farmers dislike farming and would quit if they can therefore, finding of short-term and long-term solutions can severely impact food security.

As a long term measure, agriculture should be made sustainable by:

  1. Reducing inefficiencies and increasing income
  2. Providing protection through insurance schemes
  3. Better risk management and more efficient agricultural markets
  4. Subsidies should be directed towards the farmers not the companies.

The various national agricultural markets are yet to be linked (which means all trading happens within each, and not across), and powerful trader lobbies. Farm loan waivers may act as a temporary solution and can prove to be moral hazard in future because those farmers who are able to pay their loans might not pay it expecting a waiver. The banks may become wary in providing loans to the poor farmers who actually need it. If this is done, politicians may find it as a suitable way to bag votes in their favour again and again. These waivers will add to the NPAs of the banks and it will cost taxpayers.

Conclusion:

In the present situation, farm loan waivers act only as a temporary solution to the problems of farmers and it will not make them free from issues like decreasing farm income, debt trap or crop failures. The problems need creative engagement through which the surplus workers in the farming sector can be taken away to more productive sectors through education and skilling thereby making farming more profitable and sustainable for all stakeholders.

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