Economic Costs of Loan Waiving

Swarnima Jaiswal*
Priyanka Poddar**
Honey Gupta***

Abstract
Debt, formal or informal, plays an essential role in the lives of rural households. Past
evidence shows high rates of non-repayment in the formal banking sector. Non-repayment of
loans could be due to income shocks, beyond the control of the households, which justifies
policy intervention to ease temporary resource constraints. We all know about the loan
waiver scheme, we know that there have been many farmer suicides in the recent past, and
we also know that Indian agriculture is facing a crisis. However, there is a lot of criticism
about the loan waiver scheme which was designed to provide relief to the ailing rural
economy and bring some respite to the distressed farmers. This paper tries to analyze the
loan waiver scheme to figure out the problems in the scheme, and if the scheme is capable of
doing what it intends to do.

Keywords: Loan Repayment, moral hazard, debt relief

* Senior Research Fellow, Faculty of Commerce, Banaras Hindu University

Email: swarnimajaiswal@gmail.com , Mob. No. 9793097071
** Junior Research fellow, Faculty of Commerce, Banaras Hindu University
Email: priyanka3027@gmail.com , Mob. No. 9648596485
*** Junior Research fellow, Faculty of Commerce, Banaras Hindu University
Email: honeygpt25@gmail.com , Mob. No. 8004338071
Introduction
“I think it (farm loan wavier) undermines an honest credit culture. It impacts credit
discipline. It impacts incentives for future borrowers to repay. In other words, waivers
engender a moral hazard. We need to create a consensus that such loan waiver policies are
eschewed. Otherwise, sub sovereign fiscal challenges in this context could otherwise affect
national balance sheets. Debt waivers also entail transfers from tax payers to borrowers. If
on account of this overall government borrowing goes up, yields on government bonds also
get impacted. Thereafter, it can also lead to crowding of the private borrowers as higher
government borrowing can lead to increasing cost of borrowing for others.”
- Urijit Patel, Governor, Reserve Bank of India.

Intervention in the credit market through household debt relief has been a fiscal policy
adopted by many governments both at central and state level since many years. Economists
like Keynes were very much in favour of government intervention through fiscal channels
during exceptionally harsh economic circumstances. But not all are in favour of these
interventions. On one hand economic argument in favour of stimulus programs operating
through credit markets rests on the premise that in situations where households are unable to
ensure themselves against macroeconomic shocks, such policies will prevent excessive dead
weight losses from foreclosure, Bolton and Rosenthal [2002]. They also help reduce high
level of debt which distorts consumption and investment decisions of households, Mian et al.
[2012]. On the other hand these economic stimulus programs may distort borrower incentives
and give rise to moral hazard, Gine and Kanz [2014]. They can create negative externalities
and are likely to raise the cost of credit in the long run. Despite this being a controversial
argument since many years loan waivers have been an important tool used by governments.
The debate on loan waivers is not whether it should be given or not but to see whether loan
waivers lead to sustainable development.

Objective

The objective of this research is to analyze the loan waiver schemes of different states
with the special emphasis on the year 2016-17, and compare the advantages that the scheme
offers with the present situation of Indian agriculture. The research aims to find out if the loan
waiver scheme is the best way to provide relief to agriculture, given the present crisis
situation in rural India.

Timeline of major farm loan waivers in India

 Since independence India has been an agricultural economy with a majority of its
citizens being farmers. Due to this reason a number of politicians have tried to favour farmers
by promising schemes which would help them in order to gain their votes. Loan waiver
schemes have been one such political tool used by a number of politicians of different states
for decades for vote bank politics.

 1990: The first ever nation-wide farm loan waiver was announced in 1990 and cost
the state Rs 10,000 crore.

 2008: Rs 52,000 crore were released by the Indian government as part of the
Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS), launched in May
2008, in order to address the financial indebtedness of the farmers right before the
2009 general election.

 2014: In Andhra Pradesh, a farm loan waiver of Rs 40,000 crore was announced while
a Rs 20,000 crore farm loan waiver was announced in Telangana.

 2017: Uttar Pradesh announced a farm loan waiver of Rs 36,000 crore. Maharashtra
soon followed suit with an Rs 35,000 crore waiver, though the actual amount is
expected to be much greater.

India faces a cumulative loan waiver of 3.1 lakh crore or 2.6% of the country’s GDP in
2016-17; a waiver of this scale could pay for the 2017 rural roads budget 16 times over or pay
for 443000 warehouses or increase India’s irrigation potential by 55% more than the
achievements of the last 60 years; according to calculation based on detailed analysis of the
data. As demands for farm-loan waivers grow across Punjab, Haryana, Tamil Nadu, Gujarat,
Madhya Pradesh, and Karnataka-after Uttar Pradesh, the states announce write off as under:

 Uttar Pradesh Chief Minister Yogi Adityanath after its first cabinet meeting
announced on April 4, 2017 Farm Loan Waiver of Rs. 36,359 crore that includes Rs.
30,729 crore of 2.15 crore small and marginal farmers, who had taken a crop loan up
to Rs 1 lakh each and an additional Rs 5630 crore to write-off NPAs of 7 lakh farmers
of the state. The state government plans to issue farmer bonds to repay the dues of
banks, but there are posers on whether UP will find any taker for these bonds.

 Tamil Nadu’s late Chief Minister J. Jayalalithaa on being sworn-in on May 24, 2016
had waived the loans of 16.94 lakh marginal and small farmers who owned less than 5
acres of land, imposing a financial burden of Rs. 5,780 crore on the state government.
 The burden on the state exchequer increased from 5,780 crore to 7769.33 crore. The
Supreme Court however, put a stay on the Madras High Court Order.

 Punjab Chief Minister Amarinder Singh on June 19, 2017 announced total waiver of
entire crop loans for small and marginal farmers with land holdings of up to 5 acres
and a flat Rs 2 lakh relief for all other marginal farmers, irrespective of their loan
amount, thus pave the way for eventual total waiver of agricultural debts to implement
a major poll promise of the ruling party. The move would benefit a total 10.25 lakh
farmers having land up to 5 acres, and is likely to cost government around Rs 10,000
crore.

 Karnataka Chief Minister Siddaramaiah on June 21, 2017 announced that the state
will waive off farm loans up to Rs. 50,000 which were taken till June 20 2017, a move
that will cost the state exchequer Rs 8165 crore and will help 22, 27, 506 farmers who
had obtained loans from cooperative banks.

 Maharashtra Chief Minister Devendra Fadnavis on June 24 2017 announced a Rs

34,000 crore loan relief for farmers saying all individual loans by farmers below Rs.
1.5 lakh will be waived. The move will benefit 89 lakh farmers. This is the biggest
loan waiver in the country and the scheme will benefit 89 lakh farmers, making 40
lakh debt fress, according to Fadnavis. Maharashtra’s public debt is set to cross 4 lakh
crore by the next March and will up spending more than 31000 crore just to pay
interest on its debt.

 Madhaya Pradesh Chief Minister Shivraj Singh Chouhan has announced on June 8,
2017 a loan settlement scheme which it said will cover around six lakh farmers with
accumulated dues of Rs. 6,000 crore, to placate farmers who took to the streets and
indulged in widespread violence and incidents of arson in Mandsaur demanding
enhanced minimum selling price and loan waiver.

Economics of Loan Waiver and cost to the Government

According to official data, agricultural loan outstanding stood at Rs 12.6 lakh crore as
of September 2016, while more than half of the households engaged in farming are in debt,
with an average loan burden of Rs. 47000; 52% of India’s agricultural households have debt.
Now if all the states waived off farm loans, it will cost the country more than Rs. 3 lakh
crore, i.e., more than 2% of India’s GDP.
 The 2006 M.S. Swaminathan report that had called for fixing the Minimum Support
Prices (MSP) for crops at levels at least 50% more than the weighted average cost of
production, was incorporated in BJP’s 2014 Lok Sabha election manifesto. But the so-called
Swaminathan formula of minimum 50% profits remains a mirage for the farming community.

Agriculture in India has been facing many issues such as:

 Fragmented land holdings.

 Depletion of water table level

 Deteriorating soil quality

 Rising input costs and less output

 Low productivity or the output prices may not be remunerative

 Vagaries of monsoon or the natural calamity make it difficult for farmers to repay
loans.

 Low marketable surplus.

 Adverse marketing mechanism.

Farmers in such circumanstances face grim options and may be unable to repay loans.
Indebtedness is a key reason for many farmers’ suicides in the country. Loan waivers provide
some relief to farmers in such situations of rural distress where the centre or states offer relief
either as reduction or complete waiver of loans and take over the liability of farmers and
repay their loans to the banks.

Farmers are unable to manage their expenses and have to borrow money from money
lenders at extremely high rates as they are not eligible for bank credit. Indebtedness is a
major reason for farmer suicides in the country.

Long term solutions are needed to solve farmers’ woes and making agriculture
sustainable by:

 Reducing inefficiencies.

 Increasing income.

 Reducing cost and providing protection through insurance schemes.

  We need to boost agricultural productivity, revamp irrigation and canal network.

 Improve rural and district roads.

 Restrictions on market freedoms in agriculture must go. Various national agricultural

markets are yet to be linked.

 Power supply must enable food processing and climate controlled storage

 Promise of minimum support must be realized in practice.

Conclusion

Farm loan waivers may act as a temporary solution to the problems of farmers but will
not make them free from issues like decreasing farm income, debt trap or crop failures. The
higher borrowings to finance loan waivers would shrink room to fund public investment,
affecting growth. These waivers can prove to be moral hazards in future because those
farmers who are able to pay their loans might not pay it expecting a waiver and waivers will
add to the NPAs of the bank and it will cost taxpayers. Since 2008 farm loan waiver,
agricultural NPAs rose three times from Rs. 7,149 crore in 2009 to Rs. 30,200 crore in 2013,
according to a 2015 study. The banks may become wary in providing loans to the poor
farmers who actually need it. The problems need creative engagement through which the
surplus workers in the farming sector can be taken away to more productive sectors through
education and skilling thereby making farming more profitable and sustainable for all
stakeholders. Farm loan waiver is becoming a necessity now because the deep rooted
problems are not being addressed related to farmers and their sufferings cannot be ignored.
Anything related to food and its producers- concerns all of us.

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