Farmers in crisis: Why loan waiver is both bad politics and bad economics
His speech if of mortgaged bedding,
On his kine he borrows yet.
At his heart is his daughter’s wedding.
In his eye foreknowledge of debt
He eats and hath indigestion
He toils and he may not stop
His life is a long-drawn question
Between a crop and a crop.
- Rudyard Kipling, The Masque of Plenty
A resurgence of the farm loan waiver culture in Indian polity has got many economists and policymakers worried. In a country where a bulk of the farmland is rain-fed, the need to offer some relief to a drought-hit farmer is serious. But it is an acknowledged fact that loan waivers are a wrong practice and have several detrimental long-term implications.
With Maharashtra also joining the farm loan waiver bandwagon, various state governments are expected to waive off $40 billion, or Rs 2,57,000 crore, of farmers’ loans in the run-up to the 2019 general elections in the country, a global banking group has said.
Farm loan waivers will amount to 2 per cent of gross domestic product (GDP) by the 2019 polls, as other states are also likely to follow the BJP’s Maharashtra and UP governments, according to a Bank of America Merrill Lynch (BofA-ML) report.
The concerns of the farmers are, however, quite justified. Data from the Nation Crime Records Bureau (NCRB) shows Maharashtra accounted for over a third (4,291) of total suicides by farmers and agricultural labourers in India (12,602) in 2015, the highest among all Indian states.
A staggering 43 per cent of suicides by farmers in Maharashtra were due to bankruptcy and indebtedness, while 18 per cent suicides were due to crop failure. The usual populist fixes - such as farm loan waivers - are not going to defuse this crisis.
Rather, policymakers must now remove the structural bottlenecks in India’s farm economy. It follows that holistic solutions to farmer distress will have to combine creation of non-farm jobs and enhancement of farm incomes.
Ashok Gulati, an agriculture specialist at the Indian Council for Research on International Economic Relations, argues that “farmers are selling below their cost, whether it is potato, tomato, onion or pulses. The government only wakes up when the farmers hit them on the head”.
The authorities are eager to keep prices low to accommodate the growing demand in cities, he said. “It’s a typical urban bias in the system,” he said. “They want lower prices, inflation targeting, and now the farmers are on the rampage.”
According to the 70th Situation of Agricultural Households in India conducted by National Sample Survey Office (NSSO), 90 per cent of India’s farmers have less than two hectares of land. The survey says the average farm household makes less than Rs 6,500 a month from all sources of income; they’re only kept afloat by government schemes that funnel money to them and by periodic waivers of farm loans.
To improve their lives, farmers need a way out of agriculture and into the manufacturing or services sector. In fact, most small-scale farmers would happily sell their land, if only they could be provided employment in lieu of it.
India’s developmental failure since 1947 has been its inability to move the huge mass of people involved in agriculture to industry and services. As the share of agriculture in the national output pie falls, any crisis hurts those dependent on it disproportionately.
Loan waivers are both "bad politics" and "bad economics". Indebtedness is the most acute problem faced by small and marginal farmers. However, their borrowings are primarily from moneylenders and hence a loan waiver is not going to make any sense for them. It is the richer farmers who are the real beneficiaries of such populist policies.
The problems faced by small farmers are complex and require a ruthless political will to address them. Their landholdings are below the economically viable threshold - the result is the cyclical appearance of bad loans and poor rainfall. Loan waivers have little to do with ending the conditions that lead to such problems.
Debt relief programmes fail to provide assistance to landless farmers, who do not have access to bank loans and some other farmers who depend on money-lenders. The write-offs are a disincentive to the banking system because people have expectations of future waivers as well.
The borrowers see value in strategic defaults. While it is important for banks to make credit available to farmers so that they can leverage and do better, it is also important to maintain credit discipline.
Loan waiver schemes vitiate the credit culture and make it tougher for banks to continue lending to these segments. They create moral hazards in the financial system by rewarding those farmers who default on their loans, offering nothing to those who pay.
They do not take into account the loans farmers have taken from the informal sector. There is also no distinction between voluntary and involuntary defaults, so it actually rewards those that have willfully defaulted. Additionally, the scheme does not take into account climatic conditions and fertility of soil. Farmers in certain areas face a higher risk of crop loss on account of weather conditions.
Frequent debt waivers may prod banks to invest in alternatives to farm lending such as the Rural Infrastructure Development Fund instead of reaching out to individual farmers to meet their agriculture lending targets, giving a field day to the local money lender.
Bankers rue that a large chunk of farm loans go only in buying seeds or fertilisers, rather than being invested in mechanisation. India is the world’s second-biggest producer of rice, wheat, cotton and sugar, but its productivity is way below the world average.
Bankers bemoan the rise in "wilful" defaults among those taking agricultural loans - and using them to marry off their daughters, becoming lenders themselves, building extensions for their farmhouses, or lavishing these loans on social occasions.
“The government knows we will take out more loans in the end and fall in the same trap again and will withhold repayment of these loans too, waiting for the next election for the loan to be waived," said Vital Mhaski, a cotton farmer in Maharashtra who is Rs 77,000 in debt.
Loan waivers have little role in ending the conditions that lead to such problems. In a sense, loan waivers are a story of unfinished reforms in India. The question should be why almost 55 per cent of the population produces just 17 per cent of agricultural output. Unless this huge swathe of population is empowered, loan waivers will remain a recurring feature of the landscape.
Small farmers have little access to technology, and inconsistent access to irrigation, making them one of the most vulnerable groups to climate change. Farming for them is grinding physical work. Families plant, pick, harvest and haul by hand, with each new generation dividing up what they have into ever smaller plots of land.
A sense of deep despair runs through the lives of farmers in India. They have lost all hope - and also the will to fight. An increasing number have opted for permanent escape from their physical and emotional pain by ingesting deadly pesticides.
More than seven decades after independence, India does not have a national agriculture policy. There is a need for an integrated approach - one that addresses source sustainability, land use management, agricultural strategies, demand management and the distribution and pricing of water. Compartmentalised responses are unlikely to be adequate to address the current crises.
The decisions and actions that the country’s leadership takes - or fails to take - now may shape the future not only of India’s agriculture but its polity as well.
India’s first PM Jawaharlal Nehru said in 1947: “Everything can wait, but not agriculture.” But what India is witnessing is exactly the reverse. All paths of Indian economy are surging ahead. Agriculture is the solitary one that is beating a path back in retreat.