The economics and politics of loan waivers

The Congress promised to waive off loans to farmers in the run-up to the recent Assembly elections in Madhya Pradesh and Rajasthan, and won the right to rule those states. Now the party has decided to keep that promise. 

The move will make the farmers happy, no doubt. But there is also no doubt that it will leave the economy of the respective states in a mess so profound that there will be difficulty in extrication. It will also impact the banking sector. Worse, the loan waiver will not resolve the fundamental factors which lead to farmer debts. 

Had loan write-offs been a solution, then the problem ought to have gone away a long time ago. This is not there first time that governments have decided to waive loans, but every few years of this step the issue returns to loom large on the agricultural sector. This in itself is an indicator that loan waivers are a non-workable solution. But because they have the potential to fetch votes in the short term, political parties merrily indulge in them. 

 Let’s look at some figures cursorily. The Congress’s promise of loan write-off to farmers could cost the public exchequer around Rs 70,000 crore — close to 48 per cent of Rajasthan's annual Budget. The Ashok Gehlot regime has little leg space to go in for additional borrowings because out of the borrowing capacity of Rs 36,000 crore in the budget, it has already drawn Rs 25,000 crore.  

The situation in Madhya Pradesh is no less worrisome. Farm loan waiver here comes with a cost of roughly Rs 50,000 crore. The Congress had proclaimed that it had inherited empty coffers from the previous Bharatiya Janata Party regime. A former BJP Minister is reported to have said every citizen of the state had an average debt burden of Rs 13,853 as of March 31, 2016. 

But, having promised the write-off, the Congress regimes in the two states now have to deliver. One possibility to soften the blow is for the mandarins to work out a formula based on cut-off dates and kinds of loans taken — which will enhance the prospect of selective waiver of the loans. That will, of course, lead to resentment among those that are left out, with such annoyance being exploited by political rivals of the Congress.  

And yet, the issue really should not be about politics, because no political party has been averse to adopting this quick-fix solution to an issue that demands structural changes. Why are huge loans taken by farmers even as they know it will be difficult for them to repay? And why then are they unable to face the problems they anticipated well in time in most cases?  A simple answer would be that at the end of the day, their earnings fall far short of the investments they have made. Depending upon this gap, the farmer either falls into a vicious debt — taking one loan (often at higher rates from a money-lender) to repay another — or in desperation ends his life. On most occasions, the second follows the first. 

Most experts agree that the essence of the solution to the problem lies in the following: Reduction in input costs; diversification of crops; increase in non-farm activities and incomes for farmers; effective crop insurances schemes. 

In the first case, the cost of fertilisers, seeds, labour, machinery etc is factored. Small land-holders are not in a position to avail of high-end technology, and so they have to essentially depend on economical availability of seeds and fertilisers. The second, crop diversification, is not just essential to spread the risk but also necessary to promote cultivation of cash crops. Non-farm activities would include income generating sources that are available to the farmer near to his place. Informed commentators accept that for the small and marginal farmers, farming alone is not going to take care of his and his family’s costs and rising aspirations. MNREGA has been one supplementer, now that the scheme has been further enhanced. But that too is not enough. More avenues such as poultry, pisciculture, floriculture etc are to be adopted. 

And finally, a good crop insurance scheme that does not milk the beneficiary needs to be put in place. Although the Modi government had recently announced an ambitious crop insurance scheme, experts pointed to certain drawbacks in it, and there are reports that the government is considering a tweak to weed out the defects.  

But it has to work harder on the other aspects, such as providing the input subsidies directly into the account of the farmers through Direct Benefit Transfer, instead of through the firms. There is also the issue of the e-National Agriculture Market (e-NAM), established to empower farmers into getting better prices for their produce. The e-NAM is working well in certain regulated markets, but just limping along in many others.  

The political cost of ignoring farmer distress is obvious enough; the economic costs are huge too. Let’s not forget that the agricultural sector employs 53 per cent of the country’s workforce but contributes to only under 18 per cent of its GDP (2015-16).

While we are among the world’s top producers of various agricultural commodities, over the years the share of agriculture imports has risen ( from 2.8 per cent in 1990-91 to 4.2 per cent in 2014-15) while that of exports has come down (18.5 per cent in 1990-91 to 12.5 in 2014-15). The need of the hour, therefore, is a holistic and not a populist approach.  

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)