How the politics of loan waivers ensures farmers remain in debt traps forever

Arindam De
Arindam DeDec 22, 2018 | 09:28

How the politics of loan waivers ensures farmers remain in debt traps forever

Is the Prime Minister Narendra Modi-led BJP government responsible for all the woes ailing the farm sector?

Not really.

There is no long-term policy to pull these farmers out of their debt trap. (Source: Reuters)

Agrarian distress has been the untold story of India's economic surge in the last couple of decades. The current crisis, however, can be attributed to a host of factors like rising global oil prices and internal economic decisions like demonetisation and the implementation of GST.


Without going into a long-term SWOT analysis of these moves, it will be safe to assume that these decisions had major ripple effects on the economy.

Focusing on agrarian distress has acquired significant value as a political currency though. The agricultural sector had been the focus of the NDA — but Rahul Gandhi and the Congress highlighted the problems being faced by farmers and the farm sector. The Opposition parties too have played up the issue.

There is nothing wrong with political posturing. Governance and politics are all about perception and a negative perception is sure to be used by the other side.

Remember, the Congress was projected as leading a 'corrupt government' in the run-up to the 2014 general election.

Rahul Gandhi and the Congress have, however, committed a huge mistake by using farm loan waivers as a prop in their bid at posturing now.

Announcing farm loan waivers has become a fashion over the last decade or so.

No loan waiver policy thus far, irrespective of which dispensation announced it, or carried out implementation and monitoring, has helped farmers move out of the distress zone.

Had the scheme been effective, at least a few farmers would have benefitted from the Rs 60,000 crore waiver scheme of the UPA government.


Farm loan waivers don't help small farmers significantly. In contrast, early investment in farms does. (Source: Reuters)

Despite farm loan waivers having already been given in several states — Punjab, Maharashtra, Karnataka — we haven’t heard of any mitigation of farmers’ woes.

Still, politicians in India love to announce farm loan waivers — like the kings of yore enjoyed doling out tax waivers during festivals and calamities.

Over seventy years into a republic, we are yet to see a change in mindsets.

The arguments against farm loan waivers are numerous. First, institutional credit is more an exception than a norm in the farm sector. The 'waiver' never makes it to the beneficiary, in most cases. Second, farm loan waivers come at the end of a yearly agricultural cycle; naturally, national expenditure suffers from low productivity (low impact).

The state must stand by the farmer — but the larger chunk of inputs should happen at the beginning of the agricultural cycle, during sowing, and not after reaping.

The state should support the farmer when he is buying seeds, fertilisers, preparing his field, arranging for tractors and pumps, among other things. Major succour must be made available at the input stage. Then, expenditure in the farm sector would turn to investment.


Returns on investment would be higher, more desirable and more profitable than farm loan waivers.

Currently, farm loan waiver schemes, amounting to nearly Rs 1.7 lakh crore, are operational in India. If this amount of money was invested at the beginning of a crop cycle, imagine the returns.

This is the stage when farmers are in immediate need of support, monetary or otherwise, which can be provided either by way of subsidies or direct transfers. Extending support at this stage would automatically reduce indebtedness.

Loan waivers neither help farmers, nor the Indian economy in the long run. (Source: Reuters)

Rythu Bandhu scheme is an example of timely support. Farmers don't want dole — they want irrigation, insurance and a competitive market for their produce. A market, free of middlemen.

Farm loan waiver is also a potent trap for the banking and financial sectors. Each loan waiver adversely affects credit discipline. For the embattled farmer, it gives rise to a false sense of security.

As political parties try to outdo each other in terms of announcing waivers, it is the economy that takes the real hit. Some indebted farmers end up thinking that they will not have to repay loans. This can create a problem for institutional lenders.

Loan waivers adversely impact credit discipline. (Source: Reuters)

That would, in turn, make it difficult for small farmers to seek institutional credit. The bigger farmers can borrow from lending institutions and enjoy waivers. Farmers who lack purchasing power will still flock to non-institutional lenders, borrow at higher interest rates and fall below the poverty line.

The vicious cycle will continue — for the farmers, the politicians and the economy.

The politicians thus need to put the interests of the farmer before populism.

Will Rahul Gandhi lead the way?

Last updated: December 22, 2018 | 09:28
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