The American model
Farm loans can be designed in India in such a way that the farmers repay the loan only when the market prices are optimal.
Opponents of loan waivers -- the bandwagon includes some bankers and a section of economists -- are not fewer in number nor their view point any weak. They say that the waiver acts as a moral hazard and ruins the repayment culture. Even those farmers who have the capacity to repay won’t but wait for another round of waiver scheme.
There are other arguments, too, on the ineffectiveness of the loan waiver and rescheduling schemes; they are stronger, more logical and therefore difficult to dispute with. One argument is that the benefit of waiver did not reach majority, more than 75 per cent, of the small and marginal farmers. These class of farmers constitute bulk of the farming community -- 84.97 per cent as of 2011. Many studies show about three fourths of these farmers did not get any loans from institutional sources in the first place. So, there is no scope of their getting any benefit from the waiver scheme.
The second argument, stronger than the first one, is that if the loans are rescheduled and fresh loans are also given as is required by such schemes, then how can the farmer operating on the same piece of land which did not yield her/him enough returns to meet the first loan can now generate enough produce to meet the payment of rescheduled installment of the previous loan and that of the fresh loan besides meeting all other requirements like family maintenance and reinvestment to continue in the activity? The farmer should either borrow more – if there is any giver - to repay the dues and fall in a debt trap or evade the payment and be branded as defaulter. Is there no way to get out of the vicious cycle?
Given the will there are solutions to the problem. There are international experiences of successfully protecting the farmer’s income thereby farming there. If not communist China, Indian government may follow the American example because the reforms supporters admire American models. The US government leaves most of the things to market forces except agriculture. So, our planners and policy makers who seek to copy their models when they relate to free market concept, should also emulate those things where government seeks to intervene in view of the importance of the particular sector, here in agriculture.
This author in his recent study, on farmer income support in other countries, carried at the instance of the Centre for Sustainable Agriculture, found at least eight areas of support to the farmer’s income in the USA of which the marketing loans was found to be the most interesting, helpful to overcome the paradox of periodic loan waivers demands in India.
The marketing loans also known as ‘nonrecourse loans’ were originally designed as a price support programme. It was just a short-term loan programme to moderate supply and price fluctuations. The government offered marketing loan assistance to give farmers the ability to hold onto their crop and sell when it is most needed on the market. Without this assistance, cash-strapped farmers would be forced to sell their crops immediately after harvest, causing a temporary glut of product and very low market prices.
Now farmers take these ‘nonrecourse’ loans from the US Department of Agriculture (USDA) using their crops as collateral, which allows farmers to default on the loans without any penalty. If the farmers can sell their produce at a higher than target price, they can repay the loan with cash. If the market prices are below the mandated target price, they pay the loan at the value of the lower price, and keep the difference called marketing loan gain (MLG). Alternatively, producers can forgo the loan process and just accept a government payment for this price differential in the form of a loan deficiency payment (LDP). There are other methods like purchasing commodity certificates to clear the dues. Also farmers used to surrender whatever they produced and got the benefit of closing the loan account.
Taking a cue from this programme, farm loans can be designed in India in such a way that the farmer repay the loan only when the market prices are optimal and when there are no production losses. In other circumstances whatever produced may be procured by the government and the loan should be treated as fully repaid. The procurement in this fashion will also help the government to run its national Food Security Act.
This will resolve the problem of loan waiver for ever since loans are settled at the end of each crop. If the scheme involve some additional costs over and above what is now being spent, they may be taken as the essential social cost for the social benefit. After all, agriculture provides and should continue to provide food to the growing population – already about 1.27 billion – and is providing livelihoods to more than half of them.