Farm loan waivers: All-party tribute to Janardhan Poojary

Under Indira and Rajiv Gandhi, he made revolutionary contributions in popularising cheap credit

Through loan melas in the 1980s, Janardhan Poojary, Minister of State for Finance, first under Indira Gandhi and then Rajiv Gandhi, made revolutionary contribution in popularising cheap credit.

Emphasis on such credit had started under Indira Gandhi in 1972 with the Differential Rate of Interest (DRI) scheme. Banks, mostly government-owned, had to allocate at least one per cent of loans to weaker sections, including small and marginal farmers, at highly subsidised four per cent annual interest, a rate adopted against the advice of an expert group appointed for this purpose. DRI continues, but with very limited success. Targeted borrowers are apathetic about its small amounts, and the banks lukewarm with the high administrative costs.

Loan waiver is an extreme form of cheap credit — zero interest and no repayment date. In July 1975, the 20-point programme during the Emergency included planned liquidation of rural indebtedness through moratorium on debt recovery from landless labourers, small farmers and artisans. Cheap credit for the rural poor to procure income-generating assets started with a bang with the Integrated Rural Development Programme (IRDP) launched on a pilot basis in 1978. Extended rapidly to four million households by 1987, it was adjudged the “worst-ever development programme” by some studies of effectiveness. Loans were either hijacked by the rich and well-connected, or wasted with inadequate attention to forward (e.g. marketing of milk) and backward (e.g. fodder for cattle) linkages.

Then came the Poojary melas. Initially, the ruling Janata Party in Karnataka, Poojary’s home state, protested. Soon realising that the senior Congress leader had emerged as a friend of the poor by misusing banks, it declared itself not against loan melas, but the partisan manner of allowing only Congress functionaries to mediate loans.

Imitation is the best form of flattery, and over time, by promising and granting farm loan waivers, all parties started paying their tribute to the iconic Poojary. Janata Party, with Devi Lal as Deputy Prime Minister, did so in 1989. After farmers’ suicides in Vidarbha, an expert group on agricultural indebtedness, in mid-2007, recommended a few steps, but not a debt waiver. Yet, United Progressive Alliance’s Finance Minister Chidambaram’s Union Budget, 2008-09, went ahead with a waiver.

Andhra Pradesh, under Telegu Desam’s Chandrababu Naidu, and Telangana under Telangana Rashtra Samithi’s K Chandrasekhar Rao gave such waivers in 2014. Tamil Nadu, under AIADMK’s Puratchi Thalaivi did so in 2016. Recently, after his first Cabinet meeting, in Uttar Pradesh (UP), Yogi Adityanath redeemed Bharatiya Janata Party’s (BJP) election promise and announced the Kisan Karz Mafi Yojana, or Peasant Loan Waiver Scheme. Rahul Gandhi had announced “Karz maaf, bijli bill half” in his election campaign, and the waiver would have come even with a Samajwadi-Congress victory in UP. Speculation is rife that a waiver is coming from Punjab’s new Congress government under Capt. Amarinder Singh, and the BJP-led Maharashtra government may follow suit.

Promise of farm loan waivers in election campaigns has become standard fare for almost all political parties. Lack of access to institutional credit and low agricultural productivity, and reliance on unscrupulous moneylenders are at the root of rural indebtedness. Yet, politicians prefer cheap to more institutional credit. Loan waivers can be given by the stroke of a pen, and before elections, their concerns are more immediate and practical than strategic and long-term.

Waivers are problematic at best. Foremost, they send a wrong message on servicing of loans. Those who repaid, regret why they did so. One waiver triggers expectation of more to follow. The less you repay, the more you gain in the future. Incentive to repay on time weakens. Credit culture deteriorates. Once bitten twice shy, banks avoid lending in jurisdictions where waivers are granted. A waiver’s temporary relief comes at the cost of lower credit inflows.

Second, governments undertake to pay off the waived loans on farmers’ behalf by disregarding the resultant higher fiscal deficits, and/or diversion of scarce funds from productivity-enhancing rural infrastructure, such as irrigation, roads, schools and health facilities. But reality strikes when cash-strapped governments compensate banks only with considerable delays, thereby weakens the lending capacity of and lending by banks. In Telangana, the government is still in the process of paying the banks for the waiver from April 2014!

Intense competition among parties to distribute freebies, including loan waivers, has led the judiciary to step in. Noting the discriminatory nature of drought-related loan waiver only to small and marginal farmers, the Hon’ble Madras High Court has directed Tamil Nadu to extend the benefit to all farmers. The Hon’ble Supreme Court has observed that promises of freebies to lure voters shake the roots of free and fair polls, and directed the Election Commission (EC) to frame guidelines for regulating contents of manifestos.

“Poor have poor use of funds” is a common but mistaken belief. The success of microfinance proves that lending to the poor, without being usurious, can be good business. Perhaps, over and above EC regulations, time has come for poor farmers to tell politicians that they are not naïve, and they know the link between loan waivers and future availability of loans.

The writer is an economist