Freebee Politics

Debt waiver is bad tactic; it’s likely to hurt Indian farmers in the long-term perspective

By DANFES

Almost all political parties contesting ongoing UP assembly elections have promised a debt waiver for small farmers. A wide range of statistics from farmer suicides allegedly caused by indebtedness to low productivity of Indian agriculture are cited as compelling reasons that warrant a political intervention in agricultural debt contracts. Unfortunately, very few people are asking the question: Why did the economic situation of farmers not improve even after a massive national level debt waiver implemented in 2008, close to Rs 1,00,000 crore?

In a recent research paper coauthored by Prasanna Tantri (Senior Associate Director, Centre For Analytical Finance, ISB, Hyderabad) with Sankar De, we investigated the impact of the debt waiver programme of 2008 on future access to credit as well as repayment behaviour. We find that nearly half of waiver beneficiaries do not get a single bank loan during a window of four years after the waiver. Moreover, those waiver beneficiaries that manage to get credit in the post-waiver period do not show any improvement in loan performance when compared to the pre-waiver period. On February 29, 2008, while presenting the last full-fledged budget before the 2009 general elections, the then finance minister announced the Agricultural Debt Waiver and Debt Relief Scheme for small and marginal farmers. Farmers who had pledged less than 2 hectares of land were eligible for full waiver whereas those who had pledged more than 2 hectares were eligible for a partial waiver conditional on repayment of the remaining balance. The extent of partial waiver was fixed at 25percent.

It is estimated that more than four crore farming households obtained waiver benefits. Given the scale of the programme, it is natural to expect that this should have become a game changer for Indian farmers and a large fraction of Indian farmers should have come out of the proverbial poverty trap. However, in reality, no such dramatic improvement was seen after the waiver. Our paper provides one possible explanation.

We obtained transaction level data from a large bank, covering a representative sample of 26,241 loans borrowed by 9,759 waiver beneficiaries. As well, we have data pertaining to performance of loans in the pre-waiver period. For drawing inferences, we compare waiver beneficiaries with a land holding just below 2 hectares with those that are just above 2 hectares. It is reasonable to assume that farmers having a landholding of 1.99 hectares are likely to be, on an average, similar to those with 2.01 hectares. However, they differ with respect to waiver treatment. We use the above fact for identification. We find that nearly half of borrowers do not obtain the borrowers do not obtain a loan even after four years from the date of waiver. Given the highly subsidized interest rates, it is hard to believe that the waiver beneficiaries do not apply for a new loan for four years after the waiver. We perform several tests in the paper to rule out demand based explanations. As well, given that we obtain data from rural branches with thin banking coverage, it is unlikely that borrowers would have borrowed from other banks or financial institutions.

Therefore, it is likely that nearly half of waiver beneficiaries are not considered creditworthy by banks in the post-waiver period. Thus, one of the key purposes of waiver — ensuring credit flow to the distressed farmers — does not seem to have materialized on the ground.

We also focussed on loan performance in terms of default rates. We find that despite a 100percent debt waiver, default rate of loans remains as high as before. This could be either driven by continued distress or by strategic behaviour caused by expectations of future waivers. Thus the debt waiver leaves farmers in either exactly the same or even worse situation when compared to pre-waiver period, although tax payers are forced to cough up significant sums of money in the name of the poor.

The point is not that government should not help distressed farmers. Some recent government initiatives such as developing an open market for agricultural produce, increasing coverage of crop insurance, building rural roads among others are likely to be useful to the farming community. On the other hand, a blanket debt waiver which is announced before an election is likely to harm farmers more than benefiting them. Sooner or later voters will see through this and punish the political class for such opportunistic behaviour.