Loan waivers: futile, bad for economy

An epidemic of farm loan waivers has spread across many states in the country, which would badly affect their financial health and eventually the national economy. The newly elected Congress governments in Madhya Pradesh, Chhattisgarh and Rajasthan have announced farm loan waivers in quick fulfilment of the party’s poll promises. The BJP-led government in Assam has followed suit. The party’s government in Gujarat has announced a waiver of power bill arrears in rural areas. In the last few months, similar benevolence has been shown by the governments in UP, Maharashtra, Karnataka and Punjab. Congress president Rahul Gandhi has challenged the Narendra Modi government to announce loan waivers at the national level. It is a populist political idea and has little economic logic behind it. Political parties go for it because farmers are numerous and have the ability to influence electoral outcomes.

Agrarian distress is real in every part of the country but the mounting loan arrears and the farmers’ inability to repay them are only a symptom. By treating the symptom the waivers relieve the pain only temporarily, leaving the ailment and the distress untouched. The UPA government’s mega waiver in 2008 did not help the farmers. Otherwise, that and other waivers would have ended the distress for all time. Loan waivers damage the fiscal position of states, make the farmers irresponsible borrowers and create the sense that loans are never to be repaid. It hampers credit flow. The waivers actually benefit only about 15% of the farmers as most of them avail loans from money lenders and non-institutional sources. Investment in the economy is affected because resources are unproductively diverted. 

The problems in the farm sector are structural and they need to be addressed for a lasting solution. Productivity should be increased through better farming practices, improved irrigation facilities and there should be better infrastructure for storage and marketing of farm produce. Agriculture-based industries should receive encouragement. Other sectors like industry and services should be developed in such a way as to absorb unemployed and underemployed labour from agriculture. Dependence of too many people on agriculture impedes its growth and hurts the farm economy. It is unfortunate that political parties do not realise the unsustainable nature of waivers, which only increase the appetite for more of them in future. Recently, a group of well-known economists, including former RBI Governor Raghuram Rajan and Niti Aayog separately advised against the farm loan waivers, pointing out their futility and negative consequences for the sector and the larger economy. Electoral plans and promises should not be the sole determinants of state policy. 

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Loan waivers: futile, bad for economy

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