By Moin Qazi
A resurgence of the farm loan waiver culture in the Indian polity has got many economists and policy makers worried. In a country where a bulk of the farmland is rain-fed, the need to offer some relief to a drought-hit farmer is serious. It is an acknowledged fact that loan waivers are a wrong practice and have several detrimental long term implications. They punish farmers who have been diligent with repayments and encourage errant behaviour among uncooperative borrowers like lax credit discipline and the use of borrowed funds for non-agricultural purposes.
Trouble in Maharashtra
The debt forgiveness in Tamil Nadu (around Rs. 8,000 crores) and Uttar Pradesh (around Rs. 37,000 crores) has led to a growing chorus for a waiver of agricultural loans in Maharashtra as well. “The unintended consequence of this could be reduced availability of credit to farmers from banks, forcing them to resort to the unorganised lending sector,” India Ratings, the local arm of Fitch, said in a research note.
Farmers from Maharashtra are on an indefinite strike, curtailing the supply of vegetables, fruits and milk to cities like Mumbai in a move that could push up food prices in the coming days. Indebted farmers are demanding a waiver on loans from the government of the big farming state similar to the debt forgiveness announced by Uttar Pradesh in April. Maharashtra would have to spend Rs 30,500 crore ($4.73 billion) to write off debts owed by 3.2 million farmers, Fadnavis had said in April.
The economics behind loan waivers
Loan waivers are both ‘bad politics’ and ‘bad economics’. Indebtedness is the most acute problem faced by small and marginal farmers. However, their borrowings are primarily from moneylenders and hence a loan waiver is not going to make any sense for them. It is the richer farmers who are the real beneficiaries of such populist policies. The problems faced by small farmers are complex and require a ruthless political will to address them. Their landholdings are below the economically viable threshold — the result is the cyclical appearance of bad loans and poor rainfall. Loan waivers have little to do with ending the conditions that lead to such problems.
In a sense, it is also a story of unfinished reforms in India. The question should be why almost 55% of the population is producing only 17% of the output. Unless this huge swathe of the population is empowered, loan waivers will remain a constant feature of the agricultural landscape.
Frequent debt waivers may prompt banks to invest in alternatives to farm lending such as the Rural Infrastructure Development Fund instead of reaching out to individuals farmers to meet their agriculture lending targets, giving a field day for the local moneylender.
Missing pieces of the jigsaw puzzle
The waiver does not take into account the loans farmers have taken from the informal sector. There is also no distinction between voluntary and involuntary defaults, so it actually rewards those that have willfully defaulted. Additionally, the scheme does not take into account climatic conditions and fertility of the soil. Farmers in certain areas face a higher risk of crop loss on account of weather conditions they have no control over.
Small farmers have little access to technology and irrigation techniques. This makes them one of the most vulnerable groups to climate change. Farming for them is grinding physical work, largely supported by their family, with each new generation being pushed into increasingly smaller plots of land. From threshing and bundling to separating grains by hand, crops have to be planted, picked, harvested and hauled by them.
Years of market-oriented reforms have unleashed a wave of capitalism and entrepreneurialism across India. High-end sectors such as information technology have made impressive strides leading to adulatory portrayals of India at home and abroad as an economic juggernaut. Despite this success, the benefits of reform have yet to extend to the hundreds of millions who toil on the land. The government has slashed or phased out subsidies for some crops, shredding a key safety net.
In a post on his Gates Note blog, Bill Gates said that it was critical to protect small farmers in the world’s poorest countries because they produce a large and growing share of the world’s food supply yet face greater risks due to climate change. In his words, “For the world’s poorest farmers, life is a high-wire act without any safety nets.” Nothing could be more true in the Indian context.
Moin Qazi, a former banker and an accomplished poet and writer, has extensively contributed articles to leading publications around the globe and authored several books.
Featured Image Credits: Visual Hunt
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