Why farm loan waivers make sense

Few would argue that between Manmohan Singh, who was India’s prime minister for two successive terms between 2004 and 2014, Narendra Modi, India’s prime minister since 2014, and Rahul Gandhi, the leader of India’s principal Opposition party and a prime ministerial hopeful, one covers a wide range of diversity as far as politicians go. We have witnessed each of them disagree with each other quite vehemently in the past. Yet, if there is one thing that unites them it is their consensus view on the use of farm loan waivers. That should surely strike as something very odd, given the overwhelming consensus amidst the commentariat that farm loan waivers are counter-productive. 

To be sure, they are. At least on paper. It is plain to anyone who has not taken such a loan himself that waiving it destroys credit culture. It incentivises the borrowers to default the next time he takes a loan. Moreover, it is unfair on those who have worked hard to pay back their dues; a waiver mocks their honest effort and arguably incentivises them too to default. It is also plain that repeated waivers would destroy the whole business of loans. Apart from the problem of ruining borrower behaviour, there is the additional worry of the fiscal impact that loan waivers have. When a government directs its limited resources to waive loans, it likely diverts them from somewhere such funds could have been productively employed. In case the waiver money needs to be raised from the market, the act involves the government crowding out the private sector and raising interest costs. 

And yet, broadly since the announcement of demonetisation in November 2016, one state government after another has been announcing farm loan waivers. Indeed, political parties and leaders who wanted to upstage the incumbents have used this tool to their advantage. In fact, Prime Minister Modi was the first one to kick off this trend when in the run-up to the crucial Assembly polls of Uttar Pradesh in March 2017, he promised a massive waiver. As it happened, Uttar Pradesh voted resoundingly in favour of the Bharatiya Janata Party and the new government announced a farm loan waiver of Rs 363 billion. Since then, all big states with a significant farming presence that went to the polls announced loan waivers. Maharashtra was the only exception as it announced a waiver in the middle of the term. Between UP and the latest waivers in Chhattisgarh, Rajasthan and Madhya Pradesh, a total of Rs 1.72 trillion worth of farm loans have reportedly been waived. Some estimates suggest that, if this trend carries on, farm loan waivers at the national level may go up to Rs 5 trillion. 

The lazy way to analyse this trend would be to blame it on competitive populism. But that would be ignoring the complex reality of why farm loan waivers have become such a fad among people who are in government. 

The starting point has to be: Why do you need them at all? There are two ways to answer this. 

The first answer is: Because it is the government’s mistake, to begin with. How, you might ask. Over the decades, Indian agriculture had two central problems. One, our farms did not produce as much as they should or ideally could. Two, that regardless of our farm production, farming itself was not remunerative enough. With each passing decade, India was more successful in countering the first problem — that is, low production. As such, we have improved both productivity as well as production across various agri-commodities. However, the second issue has continued to remain a thorny one. Farmers find themselves facing terrible odds. Low production is an obvious problem but even when they produce a bumper crop, they end up getting short-changed because — truth be told — there are no market mechanisms in India to reward a farmer. 

In the true sense of the phrase, the Indian government is the “mai-baap” of the Indian farmer. There is no aspect of farming that is not vitiated by the government’s good intentions. Indeed, with predictably disastrous results. Each year, the same crops go through the same cycle of policy missteps yielding farm distress. Frankly, thanks to the toxic hold of the government on the agriculture sector, the farmers are no longer dependent on the monsoons to ruin them. There are several examples but let’s take the case of pulses in 2016-17, when the most politically astute of the three politicians mentioned above was in power. India had achieved the highest ever domestic production —about 23 million tonnes (mt). Farmers did so as they were incentivised by the higher minimum support prices promised by the government. This amount of production was good enough to satisfy domestic consumer demand as well as remunerate farmers for their efforts. But then the government incentivised importers to bring inside the country about 7 mt — a third of domestic production — by reducing import duties to zero. This led to a massive supply glut and prices fell through the floor, ruining farmers. Something similar happened during the Congress-led government in 2012 when despite a bumper cotton crop, the government unexpectedly banned cotton exports, leading to a domestic glut and ruin of farmers. 

If such a farmer defaults on his loan repayment, who is responsible? If indeed it is the government which tries to replace the market mechanism by dictating everything from input prices and availability to exporting and importing norms and distribution, then it should be ready to pick up the punishment as well. To be sure, farmers are not alone. Given the regularity of policy missteps, long-pending infrastructural bottlenecks and inadequate development of markets, the same story is repeated across different sectors such as exporters — just think why they need all kinds of sops each year. 

The second answer is less obvious to most but is no less potent. What would be the economic consequences of not giving any such waivers? Pronab Sen had explained this in an Ideas for India piece in 2017. When farmers default, banks will not suffer as they are insured by the Agricultural Insurance Company of India (AIC), which in turn is funded by the central government. As such, even without a waiver, an all-out default, too, will entail "transfer from taxpayers to borrowers" and increased "overall government borrowing”. However, as against a waiver, in the case of a default, the impact on farmers (and the agriculture sector) would be disastrous and push them back into the clutches of usurious moneylenders. That is not to mention the resulting food inflation and higher interest rates for all. 

Between the two — waiver and default —  giving the farm loan waiver is not only the more ethical but also the economically more prudent choice. If indeed we (the non-farmers) want to remain on our moral high horse, then at least argue for unshackling farming from existing onerous regulations first. Alas, if only we had a leader who believed in the ability of the markets to provide solutions.