Farm loan waivers are great politics, but do they help farmers? Here’s what the numbers say

The schemes are a result of the politicisation of agrarian crises. They benefit politicians for sure. Does the kisaan gain much?

 |  6-minute read |   20-12-2018
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Congress president Rahul Gandhi recently declared he ‘wouldn’t let the PM sleep’ till farmers’ loans were waived.

The party has been talking about farm loans aggressively, probably because it believes it owes its recent Assembly election victories to the promise of loan waivers.

While it can be debated whether the Assembly elections verdict was more due to anti-incumbency against the BJP than any other factor, it is indeed true that farm loan waivers were instrumental in the 2009 General Election victory of the Congress, and the 2017 Assembly poll win of the BJP in Uttar Pradesh.

Taking cues from this history, Gandhi has now chosen to bet heavily on the promise of such schemes.

Congress president Rahul Gandhi has been attacking the government vigorously on the issue of farm loan waivers. Congress president Rahul Gandhi has been attacking the government vigorously on the issue of farm loan waivers. (Photo: PTI/file)

On its part, the BJP too is similarly generous with farm loan waivers, only recently promising these in Odisha and approving them in Assam.

Both the national parties, thus, are trying to woo voters at the cost of ignoring basic principles of the economy — they are ignoring the fact that whoever comes in power in 2019 will have the task of managing the country’s financial affairs.

India’s first nationwide agricultural loan waiver scheme, The Agricultural and Rural Debt Relief Scheme, came into force in May 1990. The scheme was introduced by the VP Singh government in its first year of power, with the stated motive of providing relief to farmers facing high levels of debt.

Impact analyses and research on the scheme later showed an increase in defaulting by borrowers, especially by non-beneficiaries, as they expected that a similar scheme would relieve them of their loans too.

In the decades since, loan waivers have become a standard demand by farmers — and a stock solution by governments.

But the prudence of the idea has always been contested.

In 2008, a government-appointed expert group on agricultural indebtedness, headed by Dr R Radhakrishnan, submitted its report, which fell short of recommending loan waivers. What the report did say was that indebtedness was caused by a lack of cost-reducing technologies, which can make cultivation remunerative.

In the 2008-2009 Union Budget, then-Finance Minister P Chidambaram — while acknowledging that loan waivers were not recommended by the expert group — announced a scheme for debt waiver that would cost the Government of India Rs 52,259.86 crore, and would help 3.73 crore small or marginal farmers.

This Agricultural Debt Waiver or Debt Relief Scheme (ADWDRS) was a majorly populist move, and proved to be a big factor in the re-election of the United Progressive Alliance (UPA) government after the 2009 General Elections.

It was said that the states which received more waivers were the ones where the Congress fared better.

The scheme, however, was panned by economists — most notably, in the World Bank Group-funded paper titledThe Economic Efforts of a Borrower Bailout: Evidence from an Emerging Market. The paper pointed out that the scheme punishes the people who repay their loans on time, and concluded that post-its introduction, there was an increase in defaults, even among borrowers who were previously in good standing. 

the prudence of the idea has always been contested.The prudence of farm loan waivers has always been contested. (Photo: Reuters/file)

The ADWDRS model was followed in Andhra Pradesh and Telangana in 2014.

In Andhra Pradesh, the Telugu Desam Party (TDP) promised farmer loan waivers that cost the state Rs 24,000 crore. In Telangana too, loan waiver was promised ahead of the 2014 elections, and the promise was fulfilled after the victory of the Telugu Rashtra Samithi (TRS). This cost the state Rs 16,372 crore.

However, measuring the impact of these waivers is difficult as they were followed by droughts in the two states.

The most significant criticism for these schemes, however, did come from then-Reserve Bank of India Governor Raghuram Rajan, who stated that they could lead to beneficiaries expecting such reliefs regularly, and in anticipation of them, not paying up even when they could.

The loan waivers in Andhra Pradesh and Telangana were followed by similar announcements in Tamil Nadu, Maharashtra, Uttar Pradesh and many other states. In fact, the Andhra Pradesh Planning Commission Vice-President Kutumba Rao in 2017 claimed that the state’s scheme was a reference point for the Maharashtra and Uttar Pradesh governments for their own loan waiver initiatives.

Such promises in state after state prompted a statement from the then-RBI Governor Urjit Patel, who said loan waivers would cause higher-than-budgeted revenue expenditure, leading to fiscal deficits and having an adverse effect on lenders.

In fact, when the ADWDRS was announced in 2008, the then-Secretary for Agriculture had apparently claimed it was a ‘one-time scheme’. However, the initiative’s electoral efficacy has led to political parties making it a stock feature of their poll manifestos.

The scheme’s drain on state exchequers is easy to establish, though evidence of a link between loan waivers and a decrease in farmer suicides is harder to find.

In Madhya Pradesh, for example, there are about 22.18 lakh defaulting farmers whose debts add up to 14,344 crore. This comes at a time when the state is already reeling under a debt of Rs 1.60 lakh crore — underscoring the need for tangible results against the investment made in farm loan waivers.

Farm loan waivers are a result of the politicisation of economic solutions to agrarian crises. Given how widespread they have become, it is vital to assess and understand their impact.

Year

(End of March)

Total Gross Advances

Gross NPAs

Growth in Gross NPAs

2002

645,865

71,113

13.1

2003

739,125

70,042

-1.5

2004

859,092

63,538

-9.3

2005

1,125,056

58,024

-8.7

2006

1,473,723

51,243

-11.7

2007

1,893,775

49,997

-2.4

2008

2,331,750

55,695

11.4

2009

2,788,424

68,216

22.5

2010

3,264,907

81,808

19.9

2011

3,992,145

94,121

15.1

2012

4,666,337

137,102

45.7

The data presented in Table 1 (source: RBI) shows a clear increase in the amount of non-performing assets (NPAs) post-2008 — when the ADWDRS was introduced — implying that farm loan waivers create a hazard that goes unaddressed, as the scheme punishes those who are productive and ensure their loans are paid off. The increase can also be attributed to a shift in the mindset towards repayment of loans as a whole.

The other criticism of the scheme is that it would not provide assistance to tenant farmers, who would not be able to take loans on the land they farm as they do not own the land.

Impact on farmer suicides

Specific data on farmer suicides has only been assessed since 1999. The table below (NCRB) charts farmer suicides based on National Crime Records Bureau data. 

 

suicide-table_121918090202.jpg

As the table shows, the overall trend of farmer suicides in India from 1995 to 2004 was on the rise. From the year 2005, there has been a gradual decrease. However, the year 2009, immediately after the loan waiver in 2008, showed an increase in suicides, after which the rate stabilised again.

This goes to show that the relation between farmer suicide rates and loan waivers is weak — if it even exists in the first place.

This not only showcases the need for viable and sustainable solutions in agriculture, but also emphasises the importance for evidence-based policies in the Indian policy landscape.

The use of loan waivers to appease farmers, a major vote bank, is a classic example of how the politicisation of economic issues leads to inefficient — and often harmful — economic decisions taken for political gains.

Thus, to ensure that loan waivers lead to economic growth, or at least, relieve stress among farmers, the scheme needs to be subjected to policy impact evaluations to map out its results and consequences.

Also, governments need to move away from loan waivers, and towards making investments in human capital and infrastructure, in order to make sure that public money is used in achieving tangible results.

Also read: How Gandhian agriculture can save farmers and farming in India

Writer

Ramanand Ramanand @iramanandn

Author is research fellow in Department of Education, Delhi University. His area of specialisation is Dalit and Tribals.

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