Waiving loans doesn’t end the distress

After the Yogi Adityanath government waived farm loans of about ₹36,000 crore for UP farmers, pressure has mounted on other States to follow suit. But contrary to common belief, debt waivers aside from possibly guaranteeing electoral victory, do little to alleviate the plight of farmers. Neither do they help kick-start the rural economy nor spur agriculture investment. In fact, loan waivers only compound the problems faced by farmers by tarnishing their credit history and restricting access to institutional credit. Worse, they create a moral hazard by disrupting the credit discipline among borrowers.

The solution lies in offering ways to improve farmers’ income — whether through better price for produce, introducing methods to generate non-farm income, or saving on costs of farming.

The first-ever nationwide farm loan waiver was announced by the VP Singh government in 1990 at a fiscal cost of ₹10,000 crore. Banks ended up paying a huge price for this as many borrowers started to default, in anticipation of more waivers. An ICRIER paper in 2015 entitled ‘Evaluation of Credit Policy for Agriculture in India’ makes a reference to the study of Shylendra and Singh in 1994 which showed that following the bailout programme, the loan recovery of Primary Agriculture Credit Societies in Karnataka fell sharply. It dropped from 74.9 per cent in 1987-88 to 41.1 per cent in 1991-92.

Debt relief packages destroy the credit culture. A World Bank research paper shows that for a standard deviation of one in bailout exposure, there is a 4-6 per cent decline in the number of loans. This study was done in 2008 after the then Finance Minister P Chidambaram wrote off a massive ₹50,000 crore of farm loans. What happened after the bailout was that banks reduced exposure to districts where the write-offs were high.

Reserve Bank of India data shows that non-performing assets in agriculture for commercial banks rose after the 2008 debt waiver programme. Between 2009-10 and 2012-13, NPAs of SCBs (in agriculture) rose from ₹10,353 crore to ₹30,200 crore.

The claim of the supporters of the bailout programmes that it has a positive impact on rural economy is also wrong, says the World Bank paper. “We used regionally disaggregated data to test for the effect of the bailout on rural productivity, wages and employment. Our results identify a precise zero for each of these outcomes.”

The study has shown a low spending multiplier from the debt relief programme. Debt waivers are bad for everyone: those who receive debt relief as also for those who do not benefit because they didn’t have any overdue loan, says another research paper (‘Borrowing Culture and Debt Relief: Evidence from a Policy Experiment’, April 2013). The first category of borrowers become defaulters in banks’ book, and are denied loans in the future. The other category of borrowers who are discontented because they didn’t benefit the last time, build hopes for a fresh waiver and stop repayments. For fresh loans , they then borrow from the informal sector at a much higher cost.

The recent experience in debt waivers in the country has not been good. In 2014, before the elections, both N Chandrababu Naidu’s Telugu Desam Party and K Chandrashekar Rao’s Telangana Rashtra Samithi promised loan waivers to farmers in Andhra Pradesh and Telangana. Both saw victory in the polls and implemented the waiver programme. But, given its massive scale — ₹40,000 crore for Andhra Pradesh and about ₹17,000-20,000 crore for Telangana — the States had to add many riders to the scheme. The loan waiver, finally, only compounded the problems of farmers. According to the National Crime Records Bureau, farmer suicides in Andhra Pradesh went up to 516 in 2015 from 160 reported in 2014, while in Telangana it rose by over 50 per cent, to 1,358 deaths in 2015.

Debt waivers offer only short-term relief. Also these do not offer any respite to the most underprivileged farmers who are seldom entertained by banks and end up borrowing at high interest rates from money-lenders. The data shows about 30-35 per cent of farmers in the country still depend only on non-institutional credit.

Debt waivers should be replaced by a comprehensive package for complementing the income of farmers. The respective State agri departments need to work with their agriculture universities and draw up a plan for improving the non-farm income of farmers through poultry farming, cattle breeding, or fisheries. They should help farmers make the choice of right crops and variety. Ways to reduce costs and improve farm productivity have to be brought in. Ensuring a good price for the produce is also important. E-NAM, the Centre’s flagship electronic national agri market scheme, is still stuck at various levels of implementation. Many States are yet to modify their APMC Act to create a single market for facilitating trade through e-NAM portal.

The crop insurance scheme is also one way to ensure farmers do not suffer losses because of crop failure. The new version of the scheme, the PM Fasal Bima Yojana, has achieved limited success. By covering largely only loanee farmers ( these are sold through banks that automatically debit the loan account with insurance premium), this scheme has turned to be more advantageous to banks than to farmers. Small tenant farmers under pressure from the high cost of lease rent and borrowing from money-lenders, are still unaware of this insurance. Even when loan waivers become necessary, as during a natural calamity, they should be directed only to small and marginal farmers.

An unconditional bailout for every farmer is an unnecessary burden to the exchequer, when large farmers are capable of absorbing the loss in most cases. Also, the Government should prevent bailout programmes becoming a disincentive for diligent borrowers to pay their dues. Offering credit at a lower rate the following year to good borrowers, for instance, can help reduce the moral hazard to some extent.