Farm Loan Waivers are Temporary Solution to Tackle Rural Distress

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 5,630 crore to write-off NPAs of 7 lakh farmers of the state; by Yogi Adityanath in its first cabinet meeting has raised spate of such demands from other states that include Tami Nadu, Punjab & Maharashtra.

Banks provide loans to farmers as crop loans or investment loans to buy farm machinery and equipment. Crop loans are repayable on harvesting of the crops and Investment loans are repayable in medium to long term in half-yearly or annual installments falling due for repayment upon the harvesting season.

Agriculture in India has been facing many issues such as fragmented land holding, depleting water table levels, deteriorating soil quality, rising input costs, low productivity or the output prices may not be remunerative. Besides these, vagaries of the monsoon or the natural calamity make it difficult for farmers to repay loans. Farmers in such circumstance face grim options and indebtedness is a key reason for the many farmer suicides in the country.  Loan waivers provide some relief to farmers in such situations where the Centre or States take over the liability of farmers and repay their loans to the banks to offer relief in such a situation of rural distress.

But the past experience, and for instance an analysis, of the last nationwide Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS) 2008 of Man Mohan Singh’s UPA government, found that it resulted in no significant future productivity gains but made farmers resort to a delay in loan repayment, increase in defaults and adversely effected credit discipline. As such:

• Farm loan waivers are not the answer to tackling rural distress
• Farm loan waivers are at best a temporary solution
• Loan waiver adversely affects credit discipline and lead to wilful defaults
• Even those who can afford to pay may not repay in expectation of a waiver
• That make banks wary of lending to farmers in the future
• It is clearly detrimental to the development of credit markets
• Governmental funds that ought to shore up much-needed investment are misallocated.

Long-term solutions are needed to solve farmer woes and making agriculture sustainable by:

• Reducing inefficiencies
• Increasing income
• Reducing costs and
• Providing protection through insurance schemes
• We need to boost agricultural productivity
• Revamp irrigation and canal network
• Improve rural and district roads
• Invest in cold chains
• Farmers need formal credit links and liberal access to credit
• Restrictions on market freedoms in agriculture must go
• Futures and options markets must function
• Power supply must enable food processing and climate-controlled storage
• Promise of minimum support must be realized in practice