Farm loan waivers: road to economic disaster

The waiver of farm loans worth Rs 65,000 crore about a decade ago by the then UPA dispensation, with an eye on the impending general elections in 2009, had a debilitating effect on the finances of the union government (fiscal deficit during 2008-9 was in excess of 6% of GDP). But political parties do not seem to have learnt any lesson.

Early last year, the BJP government in Uttar Pradesh granted a mammoth loan waiver for small and marginal farmers, costing the exchequer Rs 36,000 crore. This was followed by the by JD(S)-Congress coalition in Karnataka granting an equally massive Rs 34,000 crore waiver earlier this year.

The monster of competitive loan waivers continues to advance with added fury as seen during the just-concluded elections in Madhya Pradesh, Rajasthan and Chhattisgarh. The waivers promised by Congress in these states will cost them Rs 38,000 crore, Rs 30,000 crore and Rs 4,000 crore respectively.

According to an estimate, the total value of loan waivers which have already been sanctioned (or are in the process of sanctioning) will, by March 2019, touch Rs 2.8 lakh crore. This will seriously destabilise the state budgets — increasing their fiscal deficit to levels much in excess of the target 3% of state GDP under the Fiscal Responsibility and Budget Management (FRBM) Act.

The attendant damage by way of increase in debt, high interest rate, deceleration in growth and higher prices is easily discernible. But, our politicians — obsessed with winning elections solely on the basis of pre-election freebies — may not be aware of the catastrophe their actions could be leading to in the long-term. To gauge what is in store for use, consider the following.

First, a loan waiver changes the psychology of a farmer who, instead of appreciating the true spirit behind it (which is to give him a one-time relief from the crisis facing him), starts believing that the government will always come forward to waive his debt. So, even if he is in a position to pay back, he decides not to. The proof of the pudding is in the eating. Following the announcement by Rahul Gandhi, tens of thousands of farmers stopped paying back.

Second, there is always a possibility of a substantial chunk of farmers being left out due to a variety of reasons. For instance, in MP, only those who had outstanding debt as on March 31, 2018, are eligible for waiver thereby leaving out farmers who got into debt thereafter. There could also be cases whereby a farmer had already paid back and hence had very little residual debt requiring waiver. Thus, in UP, several farmers got cheques for a few rupees (even paise in some cases) as there was negligible outstanding in their accounts.

Third, there are millions of farmers who don’t take loans from institutions — commercial banks, cooperative banks, regional rural banks, etc, but are heavily indebted. They borrow from ‘informal’ sources (at exorbitant interest rates) and are not eligible for loan waiver, which is available only in respect of money owed to the institutions.

Fourth, many well-to-do medium and large-scale farmers (holding greater than 4 hectares) on-lend the loans taken from the institutions at 7% to small and marginal farmers at much higher rates, thereby raking in the moolah. On top of this, when a loan waiver is given, they get the benefit of the same even as the hapless poor farmers continue to pay heavily to these rich/borrowers-turned- moneylenders.

Fifth, there are millions of non-land-owning farmers/labourers whose economic conditions are much worse than even that of marginal farmers (those with landholding less than a hectare). They are heavily indebted, having taken loans (mostly from ‘informal’ sources) at high interest rates to fund their crop-raising/family needs such as education, marriage, etc. Getting no relief from loan waiver pricks them.

Inequitable and discriminatory

By benefitting only a section of the farming community — the landing-owning farmers who alone have access to loans from institutions — loan waiver schemes turn out to be highly inequitable and discriminatory. These aggravate resentment among the majority of the poor non-land-owning farmers and workers who are already at the receiving end with regard to availability of institutional credit. There could not be a more potent case of the State violating Article 14 of the Constitution which entitles every citizen to equality before the law.

Even worse, when loan waivers become recurrent (now, farmers want Parliament to enact a law to give legal backing), this breeds in complacency across the board. It deflects farmers’ focus away from measures to improve efficiency, adopt better agronomic practices and minimise wastage — all prerequisites for increasing their incomes. When a major portion of funding for crop production is available for free (what a perennial commitment to loan waiver is tantamount to), why would they attend to these?

Loan waiver is also completely out of sync with Prime Minister Narendra Modi’s grand vision to double farmers’ incomes by 2022. All the steps taken by the government to increase irrigation, soil health cards (SHCs), neem-coated urea, balanced fertiliser use, etc., will be set to nought if the farmers develop an indifferent/cavalier attitude, courtesy loan waiver. In such a scenario, their income will only decline, making them increasingly dependent on State sops, in turn, denuding the treasury.

The impending disaster can be averted only if all parties pledge to shun this practice. But, in an environment where the public has got used to all sorts of sops and is quick to punish a party which does not promise them, this seems next to impossible. There could be hope only if the people introspect and recognise that poll-driven sops are not in their long-term interest.

Can Modi change their mindset?

(The writer is a New Delhi-based policy analyst)