AN ANALYSIS OF FARM LOAN WAIVERS

The recent grant of farm loan waivers by states like Rajasthan, Chhattisgarh, Madhya
Pradesh, and Punjab Karnataka highlights the disaccord between politics and economics.
Political parties have been using loan waivers as election sops for the past many years.
According to recent estimates, waivers worth approximately Rs 1.9 Trillion have been given.

This raises a very pertinent question if these waivers actually help the farmers in distress or
just help the political parties get a home run.

In reality, loan waiver is only a band aid solution.

RBI governor, Shaktikanta Das recently said that states waiving off loans must do a
thorough examination of the fiscal space as such reckless waive offs adversely impacts the
economy and also the borrowers.
This eventually pushes the farmers to borrow from money lenders at exorbitant interest rates
as the banks become vary of lending to farmers fearing waive offs.

DEVELOPMENT TAKES A BACK SEAT-

Waving off farm loans by states leads to a reduction in capital expenditure as a means of
reducing budget deficit.

Maharashtra, Karnataka and Rajasthan had announced farm loan waivers in 2017-18
outside the budget which led to a steep rise in revenue expenditure. To offset this, capital
expenditure was reduced by 2.5% and 12% in Rajasthan and Karnataka.

This creates a cycle in which revenue expenditure keeps on increasing and little is left to
spend on development leading to stagnation in the economy. Hence, the asset creation in
the economy suffers and productivity declines.

LENDERS SUFFER-

Due to the election season, there is an increase in the expectation of loan waivers which
ultimately slows down the repayment cycle.
If a farmer A’s loan is waived then a farmer B might get reluctant to pay his loan instalment
next year in hope of a waive off.

Many banks feel that such waivers tend to promote lax credit behaviour amongst the farmers
and also thus destroy the credit culture.

Though on paper, banks have benefited from the reduction of outstanding loans in their
books but it has made them vary of extending fresh loans to the agricultural sector.

Having required to complete priority sector lending targets as prescribed by RBI by lending
18% loans to this sector, commercial banks are in a perplexed situation.
It is important to understand that loan waive off is only a short term solution to an otherwise
long term problem.
The need of the hour is to improve infrastructure and irrigation facilities. Lack of irrigation is
one major reason behind crop failure in years of bad rainfall. Apart from this, financial
literacy amongst the farmers is required. Due to the presence of middlemen, farmers are not
even aware of the prices prevalent in the market. Setting up of co-operatives may help in
eliminating the middlemen.

This calls for a focus on long term solutions for the agriculture sector as farmer distress
requires a quick response.