The Temptation Called Waiver

First the loan, then the harassment induced by recovery & ending in suicides & the story goes on this familiar pattern ever. Is there an antidote for our Agrarian crisis?

BY DANFES

The succour called Debt Waiver isn’t as old as our civilisation. It was started by the united front government in 1990 headed by V.P. Singh to fulfil one of his poll promises. The idea behind such a scheme was to provide relief by Public sector & rural banks to the tune of Rs. 10,000 to the genuinely depressed farmers & artisans. By doing this the government also hoped to create a positive outlook towards loan recoveries in the farm sector besides helping identify wilful defaulters. Further, the government had directed the banks to establish a system of maintaining a proper credit history of borrowers covered under the scheme while promising to compensate them suitably for writing off the debt. Many Indian states also had launched debt relief and waiver programs at different times subsequently.

While some of these schemes were genuinely an attempt to help the poor farmers in difficult times, most of these were governed by political considerations. Not all who indulged in this politics of farm loan waivers benefitted from their motives, TDP (Chandra Babu Naidu) & KCR (Telangana) actually reaped a bumper harvest from such a move. In fact KCR repeated the feat the 2nd time ahead of 2019 elections. They both may have grabbed power riding on the populist mood & measure, it made their state poorer by 40k cr. & 20k cr. respectively.

Notwithstanding the real motives behind such interventions by governments, sometimes necessary, these are no more than a symptomatic relief, a balm applied to a dreaded disease called Agrarian cancer. It is such an irony, that in India, where Agriculture is a priority sector simply because it supports more than half of our country’s population, yet it accounts for only 15% of our total economic activity. One of the reasons, we are doing so badly is a drop in the principal crop production compounded by a global boom in the food grain production. This causes the local markets to crash affecting the poor farmers & their ability to produce with no tangible return on investments. If there was anything that could save the day for the Indian farmer, it was a good monsoon.

Given such a background, it is a natural corollary that the cycle of indebtedness shall prevail with every failure of a good monsoon. They do not see much support coming their way in respect of seeds, pesticides, fertilisers, if not urea, which comes to them at a cheap price anyways. In the wake of such a scenario, a farmer is dependent on credit wherever it comes from; Informal or formal sector.

So while farm loan waiver is but a necessary evil, the same is bad economics. While no body would grudge a big state with adequate & surplus capital to offer such temporary injunctions, others who depend on the centre’s largesse or alternate measures of funding shall find it hard to cope with the stress caused by such waivers. They get trapped in a vicious cycle of capital inadequacy, crippling of infrastructure projects, loss of jobs, indirect cess on society, thereby causing unrest among in society. That is bad economics.

Government after government is besieged with this predicament of farmer’s distress & while it cannot & must not turn a blind eye or a deaf ear to this menace, they have to apply their mind on finding lasting solutions.

Bankers and economists though beg to differ with the political class & the people who decide whether or not a waiver is to be granted. They (Economists) believe that the culture of loan waivers would create more wilful defaulters, disturb the credit discipline of the banking system, and impact the economy in the medium and long term. There is credible data available disapproving of such populist measures adopted by political parties for their survival. The RBI is worried that due to these waivers, credit off take by farmers has fallen in states that have given loan waivers, largely due to their (Farmers) credit scores having fallen below the credit worthiness levels. Maharashtra leads among all states that have seen a stagnation of loans. They have disbursed a meagre Rs. 25,300 cr. as opposed to target of Rs 54,200 crore.

An RBI research paper shows that loan performance of distressed borrowers who were given waivers improved in subsequent years by 16-20 percent, but that of timely re-payers fell by 11 percent. The honest farmer obviously sees the benefit of turning into a defaulter. Though farm loans going bad still account for only 6 percent of banks’ defaults as compared to 20.83 percent for the corporate sector, what doesn’t show up is the loans taken from moneylenders or shopkeepers.
It was the erstwhile governors Raghuram Rajan & Urjit Patel who have red flagged such waivers citing subsequent danger to the Credit flow, post such policy mechanism adopted by various states or by the central government.

India could emulate USA where farm loans do not form a major part of consumer debt, instead it is the student loans for which they made a provision of forgiveness to lessen their debt load. Analysts are of the view that apart from a direct benefit transfer to the farmers, we could follow the Karnataka model of managing water as a collateral policy. Their budgetary allocation for water resources has been raised to Rs 18,028 crore whilst carrying on with the interest-free, subsidized loans for farmers. Similarly in Mahrashtra where one village adopted a community developed program that included reforestation and integrated watershed development. Under this program, irrigation infrastructure was so developed and water intensive crops like sugarcane and banana were banned. As a result of these measures, Hiware Bazare became the village with the highest GDP in the country.

It may well be asking for too much of political parties in the election year. Hopefully when the heat & dust settles, we could see next government addressing the issues involving farmers in particular & rural economy in general.