Misplaced Largesse

Misplaced Largesse
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Loan waivers do little to improve the state of Indian agriculture

LESS THAN A MONTH after it was sworn in, the Yogi Adityanath government on April 4th waived off loans handed out to small and marginal farmers by banks. The bill: a whopping Rs 36,359 crore. This is a sum that Uttar Pradesh can ill-afford to dispense in such a manner, but worse, it has set a trend that will make it hard for any government to resist. Almost at the same time as the decision was announced in Lucknow, the Madras High Court ordered the Tamil Nadu government to pardon loans of all farmers in the state—irrespective of the size of their land holdings.

Loan waivers for farmers are nothing new. In 2008, the UPA Government struck off farm loans worth Rs 60,000 crore, a sum that later rose to Rs 71,000 crore. All that these schemes do is create problems for the banking sector. They certainly don’t help farmers, except provide momentary relief that is mostly illusory.

It is well known that India’s agricultural sector suffers from various structural problems. The size of holdings is usually uneconomic, making it impossible for farmers to reap benefits from cultivation. Even when farms are slightly larger—say, 3 or 4 hectares—farmers have little to shield them from shocks like bad weather and higher prices of inputs like seeds and fertilisers.

The solution to such problems is not a loan waiver. These waivers—carried out at least once every decade— turn the relationship between the banking and farm sector into a zero-sum game: a waiver helps farmers but hits the banking sector very hard. In turn, banks prefer not to lend money to farmers on their own; they are under a government diktat—part of the so-called ‘priority sector’ lending norms—to dish out dollops of money that they know will not be returned.

This is a vicious cycle that has engulfed India’s entire farm sector. For example, under the Uttar Pradesh waiver, farmers who have repaid their loans are exempt from the waiver scheme. It is a foregone conclusion that the next time these diligent farmers take a loan, they won’t repay: they will wait for a government waiver. It is these ‘helpful’ measures of governments that have hurt farmers and hobbled the banking sector. It does not need rocket science to understand that loan waivers only beget more loan waivers. Nothing more, nothing less.