Farm distress: After loan waivers, what next?

The Monsoon Session of Parliament started with the Opposition accusing the government of failing to address the problems of the farmers. "There is an agrarian crisis… The number of farmers committing suicide has been rising by the day," said the leader of the Congress in the Lok Sabha, Mallikarjun Kharge, with a demand for loan waiver. Not very far from Parliament, farmers from drought-hit Tamil Nadu are protesting at Jantar Mantar, demanding loan waiver by nationalised banks.

After resisting against populist measures, the BJP government in Uttar Pradesh was the first one to announce farm loan waiver of Rs 36,359 crore. This opened the Pandora’s Box. Four states have already announced and another four is threatening to join the caravan as distressing news of farmers’ suicide make headlines. The Maharashtra government announced Rs 34,000 crore farm loan waiver for all individual loans below Rs 1.5 lakh.

On the other hand, Governor of the Reserve Bank of India (RBI), Urjit Patel, in April warned that farm loan waiver undermines an honest credit culture and impacts credit discipline.

It is true that a loan waiver may short-charge a farmer who has diligently paid back his loans. But empirically there is no evidence that such waivers undermine the credit-culture of farmers. There have not been any such cases reported after the large-scale farm waiver in 2008. We did not even see any demand during the two years of back-to-back droughts in 2014 and 2015.

However, these waivers do have fiscal costs, rightfully pointed out by the RBI. As the state governments take the burden to repay the loans, it raises their fiscal deficit. This will result in deterioration of hard-won fiscal discipline of the states squeezing out the much-needed public capital expenditure. On the other hand, if these loans are not waived and farmers’ distress is so acute that it leads to a large-scale default on bank loans, then the central government will have to step in to capitalise these banks.

In both the cases, there will be a transfer of taxpayers money to borrowers, increases in overall government borrowing, a rise in borrowing costs and eventually crowding out of private investments. So, these loan waivers have an adverse domino effect on macroeconomic factors.
Can these loan waivers solve the problem? Even in 2008, a total of Rs 52,500 crore was spent on loan waiver by the UPA government after a severe drought. This did not help provide any permanent solution to farmer’s problems. In the nine years till March 2017, a total of Rs 88,988 crore loans have been waived off. Despite the recent announcements, sadly enough, these waivers have not been able to stem farmers’ suicide.

The farmers’ distress is genuine and the loan waivers are needed. However, the benefit may not reach all distressed farmers. Most of the small and marginal farmers do not have access to formal bank loans. The NSSO data shows that less than half of these marginal farmers in UP owe money to banks. A mere 28% of farmers with land holding less than an acre have outstanding bank loans. Most of them are indebted to local money lenders, traders or big farmers.

In Maharashtra, loan waiver is expected to help farmers in the western sector where the landholdings are fragmented and the number of marginal farmers are higher. But this region is also well irrigated and has hardly reported farmer suicides. Therefore, on the ground, these waivers may not provide relief to needy farmers. In addition, a blanket loan waiver may benefit a farmer who does not even need it. Eventually, poor and vulnerable farmers would lose access to formal credit in future forcing them to the mercy of moneylenders.

The loan waivers do not address the systemic issues in the sector. Surprisingly, farmers’ distress surfaced in a year when we had a good monsoon along with a bumper crop. The primary reason for the distress is plummeting prices of produce below the minimum support price (MSP) or seasonal price.

Supply glut caused by bumper crop along with higher imports caused prices of pulses to crash almost 20% below MSP. Demonetisation added to the problem. Severe cash crunch experienced by the traders led the farmers to dump their perishables at throw-away prices. Lower food prices, which was a boon for urban India, caused severe pain in rural India.

One of the primary problems in the agriculture sector is the small size of landholding per farmer that prevents any major investment like irrigation or mechanisation. It is reported that 83% of rural households are landless or own less than 1 hectare of land. These marginal farmers do not have access to formal credit. There is a need for farmers’ cooperatives for gaining economies of scale along with bargaining power against large buyers.

Though the government procures from farmers at MSP, only the rich farmers manage to sell at that price. The small farmers either sell their produce at a low price to cartels of licenced traders at nearest mandi or cannot even bear the transportation cost to government centres or cannot afford to wait for payment for more than a month. Despite subsidies in fertiliser and diesel, input costs are rising while output prices are falling, thus making farming unviable. On top of that, weather vagaries and crop failures are pushing them to money lenders.

The government aims to double farmers’ income in the next seven years. This cannot be done through inefficient subsidies or loan waivers. Significant investment is needed in irrigation, cold storage-warehousing and transport infrastructure, and improving the agri-market by making it farmer-friendly and removing the cartels of middlemen.

Loan waivers can help in the short term to appease this constituent of farmers. However, without investments in the sector to address the underlying problem, the demand for loan waiver will keep haunting us in the coming years.

(The writer is a research scholar at IIFT and an adviser at Policy Monks)