All the losers in the great Indian game of farm-loan waivers

Waivers could be a curse.
Waivers could be a curse.
Image: AP Photo/Mahesh Kumar A
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India’s agrarian heartland is in deep distress and the farmers are up in arms.

In early June, Maharashtra witnessed massive protests by the state’s 13.6 million strong farming community, which demanded a loan waiver. Farmers in the western Indian state went on the rampage, vandalising vehicles and pouring litres of milk onto state highways. Rattled, chief minister Devendra Fadnavis announced farm loan waivers amounting to at least Rs30,000 crore. In neighbouring Madhya Pradesh (MP), farmer protests for loan waivers have turned deadly. On June 07, five people were shot dead by police at a protest rally.

Meanwhile, on April 04, the Bharatiya Janta Party (BJP) government in Uttar Pradesh, the country’s most populous state, also announced a farm waiver, fulfilling a pre-poll promise it had given to a troubled farm sector.

India’s farmers have had a rough ride over the last decade. Prices of seeds and fertilisers have remained high, even as droughts have hit production, and middlemen abused farmers by buying produce for low prices. The Narendra Modi government’s demonetisation move last November also took the wind out of the hinterland. In effect, farming income is down and loan servicing has become difficult.

Farm loans include all borrowings extended by banks and financial institutions to farmers, including short- and medium-term crop loans and other long-term credit facilities. These loans are typically used by farmers for buying fertilisers, seeds, irrigation equipment, and even for transporting the produce. The maximum interest rate that banks can charge for farm loans is 7%, and the government provides a subsidy of 3% to farmers who are prompt in their repayments.

So, while a loan waiver should seem like a good idea for indebted farmers, there is more than meets the eye.

For one, it is a quick fix, and offers only temporary relief to farmers. ”The loan waiver is a tool, but not a transformation. They are a mechanism but not a solution. They are a relief but not an answer,” veteran agriculture journalist P Sainath said in a video explainer about the ongoing agrarian crisis.

Then, there are the banks, already reeling from massive toxic assets worth some Rs10 lakh crore, that will take a further beating. And for politicians, who often orchestrate these waivers with short-term goals in mind, the benefits are also rather limited.

In all, it’s a loss-making move for all parties involved.

No real help

Farm-loan waivers made their first major appearance in India in 1990 but proved ineffective. They stymied credit culture as farmers began to voluntarily default. This, in turn, reduced the availability of loans to farmers as banks were not keen to lend. Eventually, it took years to improve the situation.

Over a decade later, the Congress-led United Progressive Alliance (UPA) government announced a major round of farm loan waivers in 2008. For this, the government picked up a bill of Rs65,000 crore, equivalent to 1.3% of India’s GDP at the time. The impact was limited since a large chunk of farmers don’t borrow from formal institutions like banks but from private moneylenders.

“Bulk of farm loan waivers which the UPA announced in 2008 dealt with bank debt. But 90% of the debt owed by farmers is to private lenders,” Sainath said. According to him, the benefits of the UPA loan waiver policy mostly went to well-off farmers, rather than reaching the real needy borrowers.

So, farmer suicides continued unabated, despite the monetary help by governments. In 2015, for instance, some 12,602 farmers in India committed suicide, according to data from the National Crime Report Bureau—out of these, 33% were in Maharashtra. The unofficial numbers may be far higher.

A bumbling bureaucracy also makes these waivers ineffective. As a report by the Comptroller and Auditor General (CAG) of India, issued after the 2008 loan waiver, pointed out, from a sample of 80,229 farmers, 4,826 farmers were extended incorrect benefits and 3,262 were wrongly extended debt relief, while 1,564 were extended less than their due benefits.

“Instead of curing what ails Indian agriculture and rural credit markets, they (loan waivers) merely kick the can down the road,” said Milan Vaishnav, senior fellow, south Asia program, at Washington DC’s Carnegie Endowment for International Peace.

Even politicians like Fadnavis agree, though they sometimes end up eating their words. ”It (a waiver) is just one of the solutions to bring farmers out of distress. But it is not the only and sure-shot answer for the problem. We need to increase productivity. Even if you repeatedly waive loans for farmers, they will continue to remain indebted, so we need to make them capable for repaying loans,” Fadnavis said in his television show in April.

It is clear that, instead of waivers, the government should focus on building more efficient infrastructure that results in better irrigation facilities, water conservation, and a sufficient storage system for produce. Investments should be made to ensure better farm-to-market connectivity, and that farmers get a fair price for their produce.

Reticent Bankers 

These loan waivers end up creating a vicious cycle of sorts for credit-hungry farmers, as banks become reticent to lend to the sector. And with banks getting strict with collateral for future debt, and charging higher interest rates to cover losses, farmers could once again approach moneylenders, who more often than not exploit borrowers.

But you can’t really blame the banks.

“Credit discipline breaks when you waive off farm loans. Money will come in today because  (the) government will pay but when we will give (a) loan in (the) future, farmers will wait for (the) next elections,” Arundhati Bhattacharya, chairman of State Bank of India (SBI), the country’s biggest lender, said in March. “Support to the farmers is necessary but not at the cost of credit discipline.”

Already farmers have started wilfully defaulting in anticipation of waivers, the Times of India newspaper reported on June 13.

Some fear that the credit indiscipline could spill over to other borrowings. ”Apart from repercussions on the farm loans, there can also be some collateral damage to other loans as the belief sets in that you can get away without paying, and this can make the bad loan problem in India even worse,” explained Karthik Srinivasan, senior vice-president at credit ratings firm ICRA. Considering that about 12% of loans in India are already stressed, any further addition to NPAs will worsen the situation.

Then, there’s the lack of clarity about the exact process of executing the waivers, especially over how lenders will be compensated. “It is possible that instead of giving cash they may issue long-term bonds that the banks can hold. These securitised papers are not going to be as beneficial as cash for them and therefore the banks stand to lose if the government opts (for) this method of payment,” said Indranil Pan, group economist at IDFC Bank, a private lender.

Even the country’s central banker isn’t keen on farm-loan waivers, arguing that they will impact the country’s overall borrowing ecosystem. “Waivers undermine an honest credit culture… It leads to crowding-out of private borrowers as high government borrowing tends to (impose) an increasing cost of borrowing for others,” Reserve Bank of India governor Urjit Patel said in April.

Fickle politicians

Moreover, the political dividends of waivers are limited.

“Farm loan waivers, in the long term, are bad politics insofar as they are a palliative that never addresses the underlying problem: the lack of efficient markets in agriculture,” explained Carnegie’s Vaishnav. “In the short run, however, they insure a government against rural backlash.”

But their impact on state finances can be significant. For example, with the most recent round of waivers, Maharashtra’s state fiscal deficit—the difference between its expenditure and revenue—will go up to 2.71% of its state GDP, credit ratings firm India Ratings has estimated. This, compared to a budgeted fiscal deficit of 1.53% for the 2017-18 fiscal year. Additionally, the expenditure incurred by states on the loan waivers would mean less scope to spend on other key areas like infrastructure, for instance.

And the decision of loan waivers could soon spread to other states, too, as political parties start working towards the general elections in 2019. In all, Indian states could write off some $40 billion (Rs2.57 lakh crore) worth of farm loans in the run up to the elections, Bank of America Merrill Lynch said in emailed note on June 05.

Plainly speaking, that’s throwing good money after bad.