What are the disadvantages of Farm loan waiver in context of Indian agriculture? What can be done to alleviate the pangs of farmers?
The government says it wants to double farm income by 2022 through the transformation of Indian agriculture. However, the political discourse continues to focus perversely on farm loan waivers.
Even though agriculture contributes about 15% to India’s gross domestic product, a majority of the population directly or indirectly depends on the sector for livelihood.
Farm loan waiver
It might make political sense in the short run—farmers are a sizeable and powerful vote base—but, as experience shows, it is unlikely to help the agriculture sector in the long run. In fact, loan waivers can lead to several adverse consequences.
For example, Arundhati Bhattacharya, the head of the country’s largest lender, the State Bank of India (SBI), was bang on when she recently said that loan waivers affect credit discipline.
Agriculture is a bit of an issue. That is because of moral hazard that was created in 2008 when there was a write-off of large agriculture loans.
Former Reserve Bank of India governor Raghuram Rajan had also flagged the issue, as repeated loan waivers affect credit pricing and disrupt the credit market.
Evidence
Evidence from the 2008 farm loan waiver—implemented by the United Progressive Alliance government—shows that it can have unintended consequences. As World Bank have shown in its study that, bank lending moved away from districts with greater exposure to the loan waiver. Such outcomes can affect agricultural output in the medium to long run as banks may get more selective in extending credit.
A study conducted by Harvard Business School showed that agricultural credit extended by government-owned banks goes up in an election year, while defaults also increase during election time. This again highlights that political intervention distorts the credit market. In fact, in the case of repeated waivers, it makes sense for borrowers to default strategically in anticipation of a waiver. But this can become a self-fulfilling cycle with long-term consequences—defaults would warrant loan waivers, and waivers will lead to more defaults.
It was also argued that farmers were not able to invest because of debt overhang. However, the study did not find any improvement in investment and noted that there is no evidence of greater investment, consumption or positive labour market outcomes in areas where debt relief led to a significant reduction of household debt. It is not surprising that, in the case of India, government efforts to stimulate the real economy through debt relief were largely in vain given that the bailout also led lenders to reallocate credit away from districts with high program exposure.
Way Forward
To be sure, the agriculture sector needs government support but loan waivers are not the solution. On the contrary, expenditure on loan waivers will eventually leave less fiscal space for public expenditure in agriculture. India needs massive investment in areas such as irrigation, water conservation, better storage facilities, market connectivity and agricultural research. The problems in Indian agriculture are structural. They need long-term solutions. Loan waivers will only end up complicating the problem.
