Farm loan waivers can derail India’s growth story

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By Ramesh Chand

Loan waiver provides strong disincentive for those who repaid loan on time and perverse incentive for default. But the most serious effect of the waiver is potential risk of fiscal slippage .

India’s agricultural economy witnessed significant changes during the post reforms period, many of which were positive, but some were negative. Income of farmers could not keep pace with their aspirations and fast growth in the income of non-farm workers. Agricultural prices became highly volatile, at times falling too low, and at other times going very high. This period also experienced a fast shift towards the commercialisation of agriculture and market oriented production, which subjected farmers to a high level of market risk. All these factors shifted the discourse on agriculture from “development” to “distress”. This occurred despite witnessing a small acceleration in the growth rate of farm income and an increase in government support for agriculture in various forms. Currently, the total Central and state subsidies going for agriculture sector are estimated to be over Rs. 2.2 trillion, constituting close to 10% of agricultural GDP and 12% of average farm income.

The main cause for farmers’ discontent is the low level of farm income. Farmers have been seeking higher prices to address this. To meet this demand, the Central government announced a change in cost criteria for fixing minimum support prices (MSP) and thereby substantially raised MSP for kharif 2018 and rabi 2019 crops. Simultaneously, the government also expanded procurement operations to oilseeds and pulses. This has pulled up the farm harvest prices of almost all kharif crops in the 2018 harvest season, though mandi prices in many cases and crops remained below MSP. This was the first season after the announcement of MSP based on the new cost concept and procurement operations did not go as far as planned. Paddy farmers this year received a price that was 7% higher compared to 2017 season despite depressed market situation and record production. Higher MSP announced by the government resulted in an increase in the net income of paddy farmers by close to 10% or Rs. 14,000 crore. Similarly, soyabean, maize, cotton, arhar, and other major crops fetched much higher income this year compared to previous year. These achievements, which benefit all farmers, are not highlighted by experts and missed by the media obsessed with showing stories which can be related to farmers’ discontent.

States are trying to address the so-called discontent through means like waiver of farm loans, payment of direct cash assistance like the Rythu Bandhu scheme of Telangana, and procurement of crops at MSP. After recent assembly elections in five states, the attention on farm loan waivers has increased as it is believed to carry lot of political dividend. The amount involved in farm loan waiving is huge, and it has far reaching implications. Therefore, it is important to share important aspects of farm loan waivers with the public.

According to national level surveys of NSSO and NABARD, about 48% of farm households run their business with their own resources while 52% households borrowed from various sources and are under some sort of debt. Further, 30% of indebted agricultural households owe their borrowing only to private sources. These numbers imply that a maximum of 37% of farmers can benefit from universal farm loan waivers. Thus, the biggest shortcoming of farm loan waivers is that more than 60% of farm households do not benefit from it at country level and it is as high as 85% in some states.

In states with a high level of indebtedness, more than half of the crop loan is used for purposes other than crop production. Waiver provides strong disincentive for those who repaid loan on time and perverse incentive for default. Experience shows that loan waiving does not address the problem of the sector; it rather sows the seeds for the next round of loan waiving. The amount involved in loan waiving is so huge that the eligibility has to be considerably diluted to keep the burden affordable. Thus, the actual waiver turns out to be much smaller than what is announced. This becomes a serious cause of frustration for many farmers as credit institutions stop lending to them. It disrupts the credit cycle and the flow of finance to farmers, causing hardship to needy farmers. Loan waiver squeezes resources for investments and development, leading to adverse effect on growth. The most serious effect of the waiver is potential risk of fiscal slippage which can derail India’s growth story.

The best way to help farmers is to enable them get remunerative prices. This requires implementation of a series of reforms like APMC Act, Contract Farming, Essential Commodities Act, and Future Trading and Land Lease Law. Agriculture being a state subject, all these reforms comes under the purview of states. NITI Aayog and the Union ministry of agriculture have been persuading states to adopt an agenda of reform for agriculture but progress has remained very slow. There is a consensus among experts that the real solution to farm woes is in reforms in the agriculture sector and not in sops like farm loan waivers.

Source:  Hindustan Times

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