Such sops largely benefit the undeserving, bring the Union and States' budgets under stress and increase NPAs of banks
The reports of a district administration ordering the auction of the land of several farmers in Rajasthan to recover their dues to public sector banks are shocking. Land is the only asset that a farmer, especially small and marginal, has and if it is taken away, this will lead to permanent incapacitation impairing the person's ability to earn a livelihood.
The dues piled up because the farmers did not pay back because in the run-up to the 2018 assembly elections, then Congress President Rahul Gandhi had promised loan waiver and that too within ten days of his party Government taking charge. However, it has not kept the promise - not even after completing half of its term - leading to the present horrific situation.
Congress is not alone in promising farm loan waivers. Every major political party including BJP led by the Prime Minister, Narendra Modi, has promised it.In Uttar Pradesh (2017), he had promised to waive loans for all small and marginal farmers and to extend fresh credit at zero interest rate (as against 7 per cent applicable and 4 per cent for those paying back in time). Maharashtra, Punjab, Chhattisgarh, Madhya Pradesh are other major States where loan waivers involving tens of thousands of crores were promised.
We need to ponder over the implications of such a reckless trend for various stakeholders including the State exchequer, Centre and banks, especially PSBs.
Fundamentally, a loan waiver is granted under excruciating circumstances say, (i) an unprecedented drought or floods, or (ii) a massive pest attack which results in either drastic reduction in output, or extensive damage to the standing crop. Such circumstances arise once in a while and are exception to the normal. What we see is the exception becoming the normal.
Every time an election is due, political parties come up with an offer of farm loan waivers. The sole intent is to get the farmers’ vote rather than exhibit any genuine concern for them.
This drastically changes the mindset of farmers whereby they expect a loan waiver each time an election is held. So, they stop paying back; even farmers who can afford to pay back join this bandwagon. This is dangerous as it gives rise to a cult of non-payment - a potential source of creating huge NPAs, especially of PSBs.
The very thought of non-payment must not even cross our minds as it strikes at the very foundation of sustainable banking. Perhaps, one could condone this only for the small and marginal farmers with land holdings up to 2 hectares who are under acute financial distress. The irony is that, generally, loan waivers do not make a distinction. Even in states where the promise mentions 'for small and marginal farmers only’ - as in UP in2017 - large farmers find ways to circumvent.
According to a study by the RBI’s internal working group, during 2016-17, large farmers with holding over 10 hectares got away with 41 per cent of the crop loan (these are short-term loan used for financing purchase of agri-inputs) even as they account for a mere 0.6 per cent of the total number of farmers. Semi-medium and medium farmers, owning between 2 -10 hectares (they are 13.2 per cent of all) got bulk of the balance 59 per cent. At the other extreme, small and marginal farmers (they are 86.2 per cent of the total number) got very little; in fact, nearly 41 per cent of them don’t even have access to banks.
Even with regard to investment credit (this is essentially long-term used for building assets), a big chunk of this also goes to medium and large farmers. According to the committee on “Status of Farmers’ Income: Strategies for Accelerated Growth” small and marginal farmers finance 30.8 per cent and 52.1 per cent of their investment in assets respectively through informal sources such as money lenders, traders, and input dealers as they do not have access to banks.
Sadly, as brought out in the study by the RBI, the medium and large farmers having borrowed from the banks at low rates (effectively it works out to 4 per cent if the loan is paid back in time), lend this money to the small/marginal farmers at a much higher rate, thereby making huge profit from arbitrage. The study also brings out that in several States, the quantum of crop loan was higher than the value of all agri-inputs (in Andhra Pradesh, during 2015-2017, this was 7.5 times the value of agri-inputs). Considering that crop loans are taken mostly for buying agri-inputs, when the value of the former exceeds the latter, it points towards diversion of funds to non-farm uses.
In such a scenario of bulk of the bank credit being cornered by medium and large farmers, when a loan waiver is granted, a disproportionately high share ofits benefit will also go to them. Furthermore, to an extent concessional credit meant for farming is appropriated by non-farmers or unscrupulous persons, they also gain from the largesse announced by the State government.
Clearly, the intended relief from farm loan waiver is not going where it should (read small and marginal farmers). At the same time, it imposes a huge burden on the budget of States impairing their ability to stick to fiscal deficit (FD)target mandated under the Fiscal Responsibility and Budget Management Act. Being an offshoot of a promise made in an election and at the whims and fancies of the party making it (not backed by any planned exercise), the resultant liability and impact on FD is totally unpredictable and uncontrollable. It makes a mockery of fiscal consolidation exercise.
At the same time, forced by the rigor of the FRBM Act and desperate to rein in the liability, some States even look for scapegoats to avoid honoring the promise. For instance, in Rajasthan, the Government now argues that the loan waiver was meant only for farmers who had taken loans from cooperative banks (the reality is that no condition was mentioned by Rahul Gandhi when he made the promise).
On loans taken from PSBs, the State Government even wants them to write off this debt. A similar demand was made by TRS (Telangana Rashtra Samithi) to redeem its promise made in State elections in 2018. These demands only end up increasing the FD of the Centre as eventually it has to give budgetary support to PSBs whose capital gets eroded due to the write off.
To conclude, farm loan waivers largely benefit the undeserving, bring States and central budgets under stress and increase NPAs of banks. Besides, this is a corrupt practice as by promising it, parties entice voters by leveraging resources of the State. The States should shun this unhealthy practice, and if need be, the Centre should pass a law to make it happen. As for helping poor farmers, the Government should pursue agri-reforms - including in credit and crop insurance - to protect their income in an unforeseen event of steep drop in output or price realization from sale of the produce.
(The writer is a policy analyst. The views expressed are personal.)
