Successive governments over the years have failed to develop a strong market mechanism and an effective crop insurance policy to resolve the problem.


NEW DELHI: The farm loan waiver declared by the newly-elected governments in Madhya Pradesh, Chhattisgarh and Rajasthan has raised a lot of dust in the country. All sorts of arguments—political as well as academic—are being given both against and in favour of the decision by all and sundry. However, extremely contrasting views have confused the common man and blurred the real issue. Now, the moot question is: how to know what is right and who is wrong?

It all started in September 1984 when B. Janardhan Poojary, who was the Deputy Finance Minister in the Indira Gandhi-led Congress government, started organising loan melas or credit camps in his home state Karnataka under the 20-Point Programme to counter the then Ramakrishna Hegde’s Janata Party government there. Bankers were forced to disburse funds without checking the antecedents of borrowers and a misconception was created that the loans taken were never to be paid back as they would be written off once Mrs Gandhi returned to power.

Thus began a new, distorted credit culture of “borrow and forget” in the country. Poojary continued the populist policy under Rajiv Gandhi too. But the first ever national-level mass waiver came when Madhu Dandavate as the Finance Minister in V.P. Singh-led National Front government declared in February 1990 to forgo recovery of agricultural loans to the tune of Rs 10,000 crore in one go. However, the mega sop as a poll plank didn’t work and Singh had to finally fall back on Mandal.

Again in February 2008, Palaniappan Chidambaram as the Finance Minister in the Manmohan Singh-led Congress government announced a mass waiver of farmers’ loans amounting to a whopping Rs 60,000 crore. He even raised it to Rs 71,680 crore in May that year again, obviously with an eye on the general elections next month. On the top of it, he claimed that the waiver would strengthen the banking sector and the Central bank supported it. Time has amply proved what a big lie that was.

In the present scenario, eight state governments have declared farm loan waivers worth Rs 1.9 trillion within a year’s time, including Rs 60,000 crore announced by the three newly-inducted state governments. Just-exited RBI Governor Urjit Ravindra Patel had voiced serious concerns publicly over the loan waivers, saying “it undermines an honest credit culture and impacts credit discipline as it plugs incentives for future borrowers to repay… hence engenders moral hazard.”

Economists and agricultural scientists too hold similar views though they are not totally opposed to such waivers as a temporary measure. Speaking to The Sunday Guardian, Dr Tajamul Haque, who heads the Special Cell on Land Policy at NITI Aayog, said, “Small and marginal farmers do need such financial assistance from the government of the day in times of distress. Where else would they go and how would the next phase of the farming cycle start if bankers refuse them to give further loan for not being able to repay the earlier one?”

Dr Haque, who had suggested to the government a year ago to write off the loans of Punjab farmers, explained that the government was duty-bound to come to the rescue of the people if they were in need at a given point of time, but at the same time it should also develop multi-pronged strategies and long-term mechanisms for an ever-recurring problem like this.

“Farming depends on weather and the nature has its own ways… Nobody can control rains or stop calamities like drought or floods. Then how long government after government would go on waiving farm loans?” he asked.

Moreover, loan waivers don’t work at the ground level and benefit only a few better-off ones. As a matter of policy, banks do not write off loans, so governments will have to repay them on behalf of the farmers. But hardly 30% of farmers access institutional credit, whereas a large section of those who take credit from banks are big farmers. Most of the small and marginal farmers take private loans from local moneylenders and never get the benefit of such loan waivers.

“It is basically a systemic failure due to which majority of the farmers are pushed into a vicious debt cycle year after year,” rued Dr Haque, who is the former chairman of Commission for Agricultural Costs and Prices, former professor at National Centre for Agricultural Economics & Policy Research and ex-director of National Institute of Rural Development. “Successive governments over the years have failed to develop a strong market mechanism and an effective crop insurance policy to resolve the problem on a long-term basis and that’s what has brought the situation to this pass,” he added.

Besides volatile climatic conditions, farmers face a wide range of socio-political problems. Right from government policies on fertilizers and support prices, bankers’ reluctance to lend aggressively, rampant adulteration of seeds and pesticides, erratic irrigation and power supply to menace of middlemen in procurement of farm produce, improper storage facilities, badly implemented crop insurance schemes, lack of skill and capital as well as labour issues arising out of schemes like MGNREGS—they all have turned the once profitable activity into a non-remunerative one.

Moreover, the price for farm produces has stagnated over the years, while the cost of agricultural inputs has soared, drastically pushing up the cost of production. For example, after decontrolling fertilizers in 2010, the cost of fertilizers has sky-rocketed by over 1,400%, whereas the Minimum Support Price (MSP) for paddy has increased by mere 70% in the same period. Unless government controls cost of production and helps enhance agricultural profit, farmers will remain caught in the web of debt cycle, making loan waivers inevitable.

Farming is livelihood for a vast majority of lower classes, least educated and skilled people who are not employable in the formal sector. For a populous country like India, self-sufficiency in food grains is a must. India is just self-sufficient in food grains only because almost half of its population survive on just one square meal a day due to poverty. If all the people involved in farming abandon their occupation and migrate to urban areas in search of livelihood, it will be catastrophic for the nation as there will be an acute food shortage and a complete breakdown of the urban infrastructure.

Corroborating the fear, Dr Haque confirmed that already a large number of migrations were happening from the rural/agricultural sector to the urban/industrial sector. Cities and towns are already reeling under the pressure of inward migration. On the other hand, writing off farm loans adversely affects the fiscal situation, especially in the states where the agrarian community is large but revenue from other economic activities is not enough to compensate it. In a country where bank loans worth Rs 10 lakh crore qualify to be categorised as bad, this competitive populism is building further stress for lenders too. To sum up, loan waiver of any kind should be considered as a “necessary evil” which has to be taken as a “stop-gap arrangement”, and not as a permanent vote-garnering political tool and election-winning plank. Simultaneously, strong and effective measures will have to be taken by the political class for evolving a long-term and sustainable solution to the problem. But the billion dollar question is “who will bell the cat?” when the perpetrators themselves have taken upon the role of judges.