Are loan waivers helping farmers?

The new Congress government in Madhya Pradesh delivered on its poll promise to the farmers. Immediately after taking charge, chief minister Kamal Nath signed farm loan waiver and wrote off short-term crop loan of eligible farmers up to the limit of Rs 2 lakh, as on March 31, 2018, from nationalized and a cooperative bank. As many as 3.4 million farmers are expected to benefit from the scheme, while the state will have to incur an additional financial burden of approximately Rs 38,000 crore.

The newly-appointed chief minister of Chhattisgarh, Bhupesh Baghel, full-filled a promise made by the Congress prior to the state elections. He said short-term agriculture loans of over Rs 6,100 crore of more than 16 lakh farmers taken from cooperative banks and Chhattisgarh Gramin Banks, as on November 30, 2018, would be totally waived. Following suit, Rajasthan chief minister Ashok Gehlot too announced that farm loans up to Rs 2 lakh defaulted till November will be waived, which would cost the state exchequer Rs 18,000 crore. The BJP government in Assam too has approved Rs 600 crore farm loan waiver, which it said will benefit around eight lakh farmers of the state.

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The Congress president, Rahul Gandhi, has gone on record to say: "We will not let Prime Minister Narendra Modi sleep till he waives of loans of farmers."

This move by the Congress is likely to put pressure on the Centre. The farmers are angry and the ruling government has very few options to pacify them – waiving loans off seems to be one of the best and easiest options, but an expensive one. Last year, Uttar Pradesh chief minister Yogi Adityanath had waived off farmers' loans worth Rs 30,729 crore. The Congress is just continuing the trend. But won't this populist move hit the exchequer hard?

How effective are these waivers?

States which have earlier waived farm loans are Andhra Pradesh (Rs 40,000 crore), Telangana (Rs 20,000 crore), Karnataka (Rs 44,000 crore), Maharashtra (Rs 35,000 crore), Uttar Pradesh (Rs 36,000 crore) and Punjab (Rs 209 crore).

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The last nationwide waiver was implemented by the previous Congress-led UPA government in 2008, ahead of the general elections in 2009. It cost the Centre Rs 52,000 crore. Also, the scheme came with riders like waiver covered only marginal and small farmers and it did not cover loans from non-banking sector or moneylenders.

Also, the scheme did not see a smooth sailing. The Comptroller and Auditor General of India (CAG) found that in many cases eligible farmers were turned down by lending institutions, whereas many who were ineligibly benefitted. It also found that reimbursements amounting to Rs 164 crore extended to micro-finance institutions were in violation of guidelines. Many evidences of tampering, overwriting and alteration of records, and poor or inadequate documentation of benefits also came to light.

Four months after the announcement of the Rs 44,000-crore farm loan waiver scheme in Karnataka, only 800 farmers have availed benefits of the scheme. Also, formulas to waive farm loans are not uniform across states. Rajasthan, for instances, calculates waivers based on the amount of crop damaged, size of land holdings and harvest volume. In Maharashtra, after more than a year of loan waiver scheme's announcement, just half of Rs 34,000 crore allocated for waivers was disbursed to 39 lakh of the state's 80 lakh farmers. The government had received over one crore applications from farmers.

Financial burden

Despite so many people engaged in agriculture and related activities, the economic contribution of agriculture to the overall GDP has been declining over the years -- it was 42% in 1951, which has come down to only 13.7% now.

Madhya Pradesh, Rajasthan and Chhattisgarh have outstanding farm loans amounting to Rs 1.1 lakh crore. The government does not have the capacity to fund loan waivers and resorts to higher market borrowings. As a result, fiscal deficit rises, market borrowings increase, interest costs go up and overall interest rates in the economy may rise, thus dampening activity. On the other hand, the government uses the budget to fund waivers while sticking to the fiscal deficit target because of which revenue deficit rises, capital spending falls, asset creation suffers and productivity declines.

Farm loan waivers have also resulted in a spike in banks' non-performing assets (NPAs) in the agricultural sector. According to a Reserve Bank of India (RBI) report, banks witnessed a spike in agriculture bad loans of Rs 11,400-crore in fiscal 2017 to cross Rs 60,000 crore -- the NPAs rose over 23% from Rs 48,800 crore in 2016 to Rs 60,200 crore in 2017. Bad loans in the agriculture sector have jumped 142.74% from Rs 24,800 crore in fiscal 2012. These bad loans in the farming sector constitute 8.3% of the total banking sector NPAs of Rs 728,500 crore as of March 2017.

The RBI in its last year's report on state finances said: "While waivers may cleanse banks' balance sheets in the short term, it may disincentivize banks from lending to agriculture in the long term…they impact credit discipline, vitiate credit culture and disincentivize borrowers to repay loans thus endangering moral hazard."

Why are farmers still poor?

Former RBI governor Raghuram Rajan recently said that "the loan waivers for farmers actually go to the best connected rather than the poorest" and underlined as to how it creates problems for the fiscal of the state too. Niti Aayog has rightly pointed out that farm loan waivers essentially aid just 10-15% of farmers as the rest don't have access to institutional loans.

The overwhelming majority of the farmers remain poor and indebted to the local money lenders because they do not have enough guarantees to procure loans from the banks.

It's a vicious cycle. Only 15% of the marginal farmers have access to formal credit. The loan waiver schemes apply to farmers who have availed of formal credit. The previous waivers led to banks reducing credit outlay for small farmers because of which it became difficult for them to get a loan and then they have to go to back to the informal sector -- the moneylenders, who don't believe in proper paperwork. Also, farmers end up turning deliberate defaulters in the hope that their loans will be waived sooner or later. Such waivers upset the genuine taxpayers as technically it's their hard-earned money that goes into paying these willful defaulters.

What is the solution?

"If corporate loans can be written off, why not farm loans?" some people argue. The simple answer is: a write-off is a cleansing of the balance sheet, but the loan recovery continues, while loan waiver frees the borrower completely from liability to pay, which is why it becomes a direct burden on the exchequer.

The government should probably waive only a portion of the loan instead of placing a cap on the quantum of loan waiver. Also, waivers are not a long-term solution. The government should give farmers tax-free seed, manure, good machinery, crop insurance, better irrigation facilities, cold storages, better transport facilities and good price of their crops. Farm loan waivers could be an effective short-term solution only until we improve the credit culture and value chain, and increase farmer incomes and agriculture productivity.