Farm Loan Waiver – Good or Bad?

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Recently, various state governments have announced farm loan waiver worth Rs. 850 million. This can negatively impact banks’ credit offtake (commercial loans) and cause further stress and amount to another agrarian crisis.

Quick Revision Mind Map

What is a farm loan waiver?

  • Farm loans are either crop loans or investment loans taken from banks to buy inputs or agricultural equipment.
  • When there is a poor monsoon or natural calamity, farmers could not be able to repay their loans.
  • So the centre or the state government take over the liability of farmers and repay the banks.
  • Waivers are mostly selective, that is, only particular loan types, particular categories of farmers, or loan sources may qualify.
  • For example, in 2008, crop and investment loans were completely waived for marginal and small farmers (those with less than 2 hectares of land ownership) and other farmers were only given a 25% reduction.

What are the arguments in favour?

  • Agriculture in India has been facing several issues such as fragmented land holding, depleting water table, deteriorating soil quality, increasing input costs, low productivity etc. Click here to know more about the farmer distress in India.
  • Output prices may not be remunerative = farmers are often forced to borrow to manage expenses.
  • Thus indebtedness is the key reason for several farmer suicides in India.
  • Loan waivers provide some relief to farmers in such situations.

What are the arguments against?

  • Farm loan waivers are just a temporary solution. They might help the government buy peace with farmers in the short run, however, they are unlikely to change much on the ground. It is a relief only for one season with the farmers going back to distress in the next season.
  • Studies reveal that loan waivers do not lead to high investment or better labour market outcomes.
  • No improvement in farm productivity for households qualifying for loan waivers reveals the failure of the programmes to achieve its desired goals.
  • Loan waivers can also negatively impact the credit flow because it creates distortions in the credit market since repeated waivers encourage default among the farmers. It also increases the NPAs (Non-Performing Assets) of banks.
  • For the government, loan waivers not only increase the fiscal deficit and interest burden but also limit its ability to undertake productive capital expenditure in the agriculture sector = affect the long-term growth in the sector.
  • Loan waivers encourage farmers to reduce productive investments and spend more on consumption. Thus in the expectation of waiver, those farmers who can afford to pay, will not pay.
  • Providing loan waivers in some states encourage farmers from other states to demand loan waiver even if they don’t need them.
  • Loan waivers = Govt’s borrowing increases = Crowding out private borrowers = increase in the cost of borrowing for others.
  • Loan waivers cost taxpayers. For instance, about Rs. 525 billion was spent on the loan waiver of 2008.
  • Loan waivers are just a tool for politicians to gain vote banks = prevent them from coming up with the long-term solution.

What are the solutions?

Click here.

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