By Apoorva Mandhani
In an attempt to fulfill its poll promise, the newly elected BJP Government in Uttar Pradesh, led by Yogi Adityanath recently waived off crop loans up to Rs 1 lakh of small and marginal farmers in the State. While the move is expected to benefit 86.68 lakh farmers in India’s most populous state, it would not only test the newly elected government’s dexterity on fiscal management, but also unleash a ‘moral hazard’ rotting the very roots of the principles of credit discipline.
The loan waiver culture
While farm loan waivers are not new in India, it is the recent resurgence of the waiver culture in Indian polity that has left many economists and policy makers worried. Reserve Bank of India Governor Mr. Urjit Patel, who termed such reliefs as a ‘moral hazard’, and sought a consensus among political parties to desist from announcing them. Further, State Bank of India (SBI) Chairman Arundhati Bhattacharya has always maintained that support to farmers should not be at the cost of credit discipline.
Waiver policies, it has therefore been opined, kill the repayment culture among farmers, subjecting the banking system to higher stress. They have the potential of dissuading farmers from making timely repayments, as also making banks more cautious in deploying funds. A decrease in available funding will only worsen the situation for farmers, making it tougher for them to raise investments and productivity.
The economics of farm loan write-offs
The effects of farm loan write-offs go beyond the banking system, by adversely affecting the states’ financial position. The relief is reminiscent of the fiscally imprudent waiver introduced by the United Progressive Alliance (UPA) Government in 2008, a year before the general elections. It was found that the UPA waiver “generated no measurable productivity gains, but led to significant moral hazard in loan repayment”. It had cost taxpayers about Rs 72,000 crore. Despite the fact that the present scheme is limited to crop loans, unlike the UPA waiver, it has been estimated that the new waiver will cost one-third of that amount.
According to a recent SBI research report, the waiver plan for Uttar Pradesh will cost the state government Rs. 27,419.70 crore, accounting for nearly 8 percent of its annual revenues. The state might have to borrow heavily to raise the resources necessary to fund the loan waiver, thereby crowding the private sector and causing interest rates to rise (or preventing them from coming down). All these factors would, thereby, function as hindrances in the desired pace of economic growth.
Need for a long term strategy
In the light of the above-mentioned factors, while the loan relief may provide some immediate relief to farmers, it is unlikely to haul them from the income equilibrium trap that they have been caught in. This handicap, which impedes their ability to make investments, can only be remedied by substantial state level efforts to improve productivity and farming yields. A long-term strategy, in the form of a national agriculture policy, could go a long way in making farming steadily profitable. Such policy would garner the much required integrated approach to farming – one that weather-proofs Indian agriculture. This would involve building irrigation infrastructure, connecting rivers, developing agro-industries, changing crop patterns, adopting more efficient farming practices and promoting crop insurance. It is pertinent to understand that with the debt relief scheme already in place, positive steps towards an integrated development strategy, as this point, would not only shape the future of Indian agriculture, but also of the country’s polity.
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