Farm Loan Waivers May Not Yield Desired Results

Farm loan waiver in Karnataka, akin to the situation prevailing in several other States of the country, is considered by political parties as an important political weapon to score over a rival political party and irrespective of the financial position of the State, it has become a matter of routine for a ruling party to waive farm loans.  If the previous Government of Siddaramaiah did it only a few months ago, the incumbent coalition Government of H.D. Kumaraswamy has done so within weeks after taking charge, given the promise that it had made to the farming community ahead of the Legislative Assembly elections held in May.  

Interestingly, the loan waiver has come about in a season when the State is witnessing copious rains thanks to a vigorous South West monsoon with all the reservoirs filled to the brim. The Chief Minister announced the loan waiver on the floor of the Legislative Assembly, as part of the State Budget.  While initially around Rs. 34,000 crores was estimated to be waived it was further enhanced to Rs. 48,000 crores with the Government deciding to waive even the current loans (with a cap) of the farmers.

The State Government is however yet to finalise an understanding with the nationalised banks on the features of the loan waiver and it is stated that the banks are reluctant to participate in the programme given the delay in the Government reimbursements. It is stated that under the present arrangement, the Karnataka Government will reimburse the banks up to Rs. 6500 crores a year over a four-year period and believes that this should suffice to meet the requirements of the banks.  The regional representatives of the banks have stated that it was for their respective boards to finalise the participation and consequently the State Government’s loan waiver scheme hangs in balance.  The State Government has also approached the Union Government for support but there is no response, as yet.

In the meanwhile, reports have it that thousands of farmers across the State are reportedly queueing up for pre-dated loans (before the cut-off date) from the cooperative banks to enable them to obtain the waiver.  Scores of politicians and middlemen are stated to be a party to this activity and this is rampant over the past fortnight. Sources in the State Secretariat said that they are helpless in the matter given the collusion of the local political leaders and the bank personnel.

Karnataka is among several other States which have repeatedly indulged in farm loan waivers.

It should be noted that the Reserve Bank of India (RBI) is firm in its opinion against nationalised banks participating in farm loan waivers since it not merely works against the financial health of the banks but also goes against the principle of maintaining financial discipline. The subject of loan waiver is not merely restricted to one State and Karnataka is among several other States like Maharashtra, Tamil Nadu, Uttar Pradesh, Punjab, Bihar etc., which have repeatedly indulged in farm loan waivers. In the recent instance, Karnataka has gone a step further in unilaterally hiking the prices of petroleum products to raise the requisite money for farm loan waiver and this has come at a time when people across the nation have been seeking a reduction in petroleum prices with nearly 50 per cent of the consumer price for petroleum products due to the high incidence of local and central duties.

Farm loans may be crop loans or even investment loans to buy equipments –for irrigation or for tilling land like that of tractors.  Both the farmers and the commercial banks earn well when there is a good harvest but the problems come in when there is a monsoon failure or natural calamities when the farmers are unable to repay loans.  The rural distress in such situations prompts the Union or the State Governments, or both, to step in and provide relief in the form of a part payment or total waiver of the loans. Essentially, the Union Government or the State Government takes over the liability of the farmers and repays the commercial banks.   

Agriculture in India has been facing many issues — fragmented land holding, depleting water table levels, deteriorating soil quality, rising input costs, low productivity. Added to this are the vagaries of the monsoon.  Farm produce generally do not fetch remunerative prices and farmers are compelled to borrow money to manage expenses.  Also, many small farmers are ineligible for bank loans and consequently borrow at exorbitant interest rates from private sources with the crop to be harvested having been mortgaged as a collateral security to the private money lender.  When nature rides roughshod over debt-ridden farmers in the form of erratic monsoon and crop failures, they face grim options. Financial debt is a key reason for the many farmer suicides in the country.

Debates over effectiveness

Loan waivers provide some relief to farmers in such situations, but there are debates about the long-term effectiveness of the measure. Critics demand making agriculture sustainable by reducing inefficiencies, increasing income, reducing costs and providing protection through insurance schemes. They point out that farm loan waivers are at best a temporary solution and entail a moral hazard — even those who can afford to pay may not, in the expectation of a waiver. Such measures can erode credit discipline and may make banks wary of lending to farmers in the future. It also makes a sharp dent in the finances of the government that finances the write-off. But farmers can decide the fortunes of political parties, and politicians are wary of antagonising them. This is the key issue in Karnataka with successive Governments focussing on waiving farm loans to win elections.

As per an estimation of the Karnataka Finance Department nearly 48 per cent of the farmers, irrespective of whether they are small or marginal farmers, stay clear of obtaining loans. Of the remaining 52 per cent, nearly 36 percent of them obtain loans from private money lenders at exhorbitant rates of interest (ranging between 25 to 70 per cent per annum) since they have no access to institutional loans for a variety of reasons. Nearly 30 per cent of the farmers who obtain loans from banks and cooperative institutions invariably are prompt in the repayment of loans.  Incidentally, around five per cent of the farmers belong to powerful lobbies and they are the ones of who are the direct beneficiaries of any loan waiver. It is this small group which is also largely involved in political activities across all rural regions.     

The incumbent coalition Government in the State has brought forth the loan waiver given the promises that it had made to the farming community during the run up to the legislative assembly elections and a similar promise had been held out to the farming community by the Bharatiya Janata Party (BJP) which incidentally lost out in forming the Government although it emerged as the single largest party with the voters preferring the BJP to the Congress and the Janata Dal (Secular).  The latter two parties however finalised an understanding to form the Government under the leadership of Kumaraswamy.  

A Crisil Research Insight report on the last monsoon sought to depict a sordid fiscal picture if more states were to latch on to the idea of loan waiver. Doing an encore on what Uttar Pradesh, Maharashtra, Karnataka (the loan waiver by the Siddaramaiah Government), and Punjab have done would set back the exchequer by Rs. 2.5 lakh crore in collective costs. This would amount to 0.5 per cent of GDP per year, assuming the waiver gets equally staggered over three years, the report said.

A week after unveiling the Rs. 34,000 crore farm loan waiver in his July 5, 2018 budget, Kumaraswamy informed the State assembly that his Government has decided to waive existing crop loan upto Rs. one lakh borrowed by farmers from cooperative banks. “I am giving one more good news to our farmers-- we have decided to waive existing crop loans up to Rs. 1 lakh borrowed from the cooperative sector. I have earmarked Rs. 10,700 crore for this,” he said winding up the debate on the budget. He said his government was committed to protecting the interest of farmers and ‘save’ them.

Farm loan waivers are “populist actions” and lead to disruption of credit discipline among borrowers.  It is imperative for State Government’s to utilise funds for a variety of agricultural development programmes rather than indulge in farm loan waivers which benefit only a small section of the farmers. Although, several major irrigation projects have been undertaken in Karnataka, the network of canals and distributaries are yet to be completed. 

An elaborate and liberal minimum support price at times of collapse in prices of farm produce (when Government needs to intervene) will bring forth benefits to a large section of the farming community in preference to loan waiver schemes. Minimum Support Price (MSP) is a form of market intervention by the Union Government to insure agricultural producers against any sharp fall in farm prices and the same can be replicated by State Governments. The minimum support prices are announced by the Government of India at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP).

According to agricultural experts, State Government’s should set apart adequate money for  a revolving fund which can be utilised for market intervention programmes at regional levels while the minimum support price of the Centre  is  fixed  to protect the  farmers  against excessive fall in price during bumper production years. The minimum support prices are a guarantee price of the Government for some of the farm produce and operates on a national scale.

The major objectives are to support the farmers from distress sales and to procure food grains for the public distribution. In case the market price for the commodity falls below the announced minimum price due to bumper production and glut in the market, government agencies purchase the entire quantity offered by the farmers at the announced minimum price. By and large, the MSP fixed by the Centre serves only the wheat and paddy growers while the growers of pulses, millets etc are at the receiving end in the agricultural markets where again middlemen rule the roost.

Yet another important aspect which can stand to the benefit of the farming community is agricultural crop insurance and sadly it is yet to gain roots.  The idea of crop insurance in India was mooted about four decades ago, when a committee on “Land Policy, Agricultural Labour and Insurance,” inter alia , had recommended a national scheme of cattle and crop insurance with the farmer, the village or the district and the nation collectively contributing to its successful operation. Despite the long passage of time, crop insurance is yet to gain popularity owing to a variety of reasons.

Farm loan waivers may not really yield long term results for those dependent on agriculture.

The advantages of crop insurance are - It provides protection to farmers against losses caused by crop failure and thereby ensures stability in farm income and simultaneously strengthens the position of co-operatives and other institutions that finance, agriculture to the extent it enables the farmer members to repay their loans in years of crop failure. Further it minimizes the problem of rural indebtedness which is largely due to failure of crops and also protects the economic interest of the farmers against possible risk or loss and thus helps in acceleration of adoption of new agricultural practices.

The Karnataka Chief Minister has gone on record in stating that nearly 65 per cent of the State’s revenue is from the Bengaluru region. Consequently the Government has to answer the people on whether the farm loan waiver serves the interests of all sections of the people or merely a small population which is largely dependent on agents and touts to reportedly obtain the benefit of loan waiver. Thus, by all accounts, farm loan waivers may not really yield long term results for those dependent on agriculture and in reality may only serve some vested interests in making quick money at people’s cost. 

( S. Rajendran  is Resident Representative, Karnataka, The Hindu Centre for Politics and Public Policy, based in Bengaluru. He was formerly Resident Editor/ Associate Editor, The Hindu , Karnataka.

In a journalistic career of nearly 40 years with The Hindu in Karnataka, he has extensively reported on and analysed various facets of life in the State. He holds a Master's degree from the Bangalore University. The Government of Karnataka, in recognition of his services, presented him the Rajyotsava Award - the highest honour in the State - in 2010. He can be contacted at [email protected] )