The ongoing dialogue surrounding agricultural distress and political moves in India has brought issues like Non-Performing Assets, the Agriculture Sector, and Farm Loan Waivers into sharp focus. Recently, a promise for a farm loan waiver was made by the Congress political party for the upcoming 2022 Uttar Pradesh Assembly election. The history, rationale, issues, and future of such waivers needs to be examined from a balanced perspective.
Understanding Farm Loan Waivers
Farm loan waivers are designed as financial relief measures for struggling farmers. They are usually announced by the central or state governments during periods of poor monsoons or natural calamities which put farmers in a position where they cannot repay their loans. The government takes over the liability of these debts, thereby reducing or eliminating the farmers’ financial burdens. However, it’s important to note that these waivers often target specific categories of loans, farmers, or sources.
History of Farm Loan Waivers in India
The practice of granting loans to peasants dates back to the Muhammad-bin-Tughluq rule (1325-51) to soothe the villagers’ hardship. The first nationwide loan waiver in independent India occurred in 1990 under the VP Singh-led government, costing the exchequer Rs 10,000 crore. In 2008, under the UPA government, a major Agricultural Debt Waiver and Debt Relief Scheme involved an outgo of Rs 71,680 crore. Since then, state governments have continued to announce similar schemes.
Reasons for Farm Loan Waivers
Small land holdings and dependency on monsoon rains make Indian farmers financially vulnerable. Over 85% of small and marginal farmers possess less than 1-2 hectares and lack basic farming inputs. With crop yields and production largely dependent on unpredictable monsoons, credit becomes a necessary resource to maintain crop production and meet everyday expenses. Failures in crops due to lack of rains or insufficient market demand can trap farmers in debt, a situation that has led to a marked increase in farmer suicides.
Concerns Surrounding Farm Loan Waivers
Despite their intent to provide aid, loan waivers can disrupt credit discipline and potentially invite free rider problems, with farmers taking loans simply in hope of future waivers. This creates a reputational risk for genuine borrowers. Additionally, repeated loan waivers cause reluctance in the banking industry to lend to the farm sector, increasing dependence on informal sector lenders. Furthermore, loan waivers can impact the banking sector negatively, as seen with the spike in non-performing assets of commercial banks after the 2008 farm loan waiver.
Charting the Way Forward: Alternatives to Farm Loan Waivers
Although farm loan waivers may provide short-term relief, they fail to provide long-term solutions to agricultural problems. There is no clear proof that loan waivers alleviate agrarian distress. To create sustainable solutions, efforts need to be invested in improving and stabilising farmers’ income, building irrigation and storage infrastructures, promoting insurance coverage and technological advancements, and encouraging open trade. Long-pending reforms in the agriculture sector need sincere implementation to significantly address farmers’ income and agrarian distress. Creative engagement aimed at making farming more profitable and sustainable should also be explored.
