Podcast | Digging deeper - The economics and politics of farm loan waivers in India

Farm loan waiver - the thing everyone knows has reached proportions that are bad for the economy but can’t be avoided because of electoral repercussions. This week, the RBI went so far as to state unequivocally that farm loan waivers are a moral hazard, saying their track record for improving productivity is "unproven". The reserve bank said studies suggest debt waivers have also led to a shift to informal sources of finance, and also added that they possess a risk to inflation.

According to the central bank, the broader state of deficit across India looks like this: as per the revised estimates, for FY19, most states hope for a 0.2 percent revenue surplus as against a deficit of 0.4 percent. This will lead to a gross fiscal deficit of 2.6 percent, against 3.1 percent in FY18. The RBI said farm loan waivers alone contributed to a third of overall slippage worries, with a 0.05 percent slippage of the overall 0.13 percent on revenue expenditure.

Farm loan waivers touched 0.32 percent of the GDP, or 4.99 lakh crore rupees, In FY18 as against estimates of 0.27 percent. The Reserve bank expressed concern that more such moves are pending for the fiscals ahead.

That reticence is apparently not shared by state governments. The new chief minister of Karnataka promised to waive off loans up to Rs 2 lakh and added that all defaulted crop loans up to December 31, 2017 will be written off in the first phase. A report released by the Bank of America earlier this month stated that with the recent move by Karnataka CM HD Kumaraswamy to waive farm loans worth 34,000 crores, or $5 billion, India’s total farm loan waiver could reach a massive $40 billion by the time the 2019 elections roll around. A report last year estimated this number could be closer to $50 billion. To put that in perspective, all of the media and entertainment sector in India, combined, is worth less than 40 billion dollars. In fact, that sector is expected to grow to 40 billion by 2020. That’s the magnitude of the problem we’re presented with. No wonder then that the RBI is showing symptoms of anxiety.

It is also no surprise that with elections less than a year away, no government, state or central will do anything to upset farmers in the immediate future. Andhra Pradesh and Telangana started this trend in 2014 with 43,000 crore and 17,000 crore loan waivers respectively. Perhaps taking a cue from those two states, many other like Tamil Nadu, Maharashtra, Uttar Pradesh, Punjab and, most recently, Karnataka have announced sops for farmers.

The chief ministers of Andhra and Telangana, Chandrababu Naidu and K Chandrashekar Rao,  found the implementation of these schemes fraught with fiscal and operational difficulties. And the RBI for refused to entertain requests for a farm loan reschedule on the lines of those extended during natural calamities like cyclones and droughts. Then RBI governor Raghuram Rajan openly questioned the effectiveness of such waivers. He said, "In some states, on certain occasions, we have had debt waivers. How effective have these debt waivers been? In fact, the studies that we have… show that they have been ineffective. In fact, they have constrained the credit flow, post-waiver, to farmers."

To make matters worse for the states, in anticipation of the loan waiver farmers in the two states stopped repaying their outstanding loans. This put enormous pressure on banks which were already reeling from the stress of bad loans.

Uttar Pradesh’s debt waiver of Rs36,400 crore is equivalent to one-fourth of the total estimated farm debt in the state. Punjab’s debt waiver worth Rs10000 crore is equivalent to less than one-seventh of the total estimated farm debt in the state. Maharashtra’s farm debt waiver appears slightly more generous as it appears to cover almost one-third of the state’s farm loans.

But farm loan waivers, as we know, are nothing new. India’s first major farm loan waiver of Rs 10,000 crore was announced in 1990 by Prime Minister V P Singh. According to the Economic & Political Weekly, it took banks nearly nine years for banks to recover this amount.

Waivers versus write-offs

The basics, first, so we know what we’re talking about here. We need to differentiate between loan waivers and loan write-offs. These terms are not interchangeable. Finance Minister Arun Jaitley clarified in Parliament in 2016 that “Write-off does not mean that the loan ceases to be a loan. We will still chase the loan. The entry in the book changes that is from being performing assets, it become a non-performing (asset)’”. So a written off loan will still be recovered. The liability of the borrower is not absolved and the loan becomes a non-performing asset.

I know what you’re thinking - NPAs. Agriculture, as a sector, has NPAs, of over 60,000 crores, according to RBI data. This number was reportedly around 24,800 crores in 2012.

A 2015 study by the International Journal of Science and Research observed that in 2013, agricultural NPAs, which stood at 25% in 2009, rose to approximately 41.8 percent of “priority sector” NPAs in public and private banks. Priority sector includes micro and small enterprises, affordable housing, and student loans.

A loan waiver, on the other hand, is the waiving  - meaning renouncing or surrendering - the liability of the borrower, in this case the farmer, by the lending institution. Farmer loan waiver schemes announced by governments are one-time settlements of the loan in which the government takes over the burden of the loan and farmers are freed from such liabilities. And the sum total of such waivers in India is said to be between 40 and 50 billion dollars.

So a waiver frees the borrower from the liability while a write-off will continue to hold the borrower liable though the recovery of the loan is not certain.

Impact of farm loan waivers on the larger economy 

How do waivers affect the economy? The first impact of a loan waiver is felt by the balance sheets of banks. Banks are later compensated by the government, but such schemes have long-lasting effects on the economy as a whole. This was the opinion expressed by RBI Governor Urjit Patel when addressing a seminar on Agricultural Debt Waiver in 2017. Mr Patel made three important observations about the fallouts from loan waivers:

First, it results in an increase in revenue expenditures for which the RBI has to engage in additional market borrowings. These, in turn, result in higher interest rates in the economy. The high cost of borrowing inevitably dissuades private borrowers and we see negative impacts on investment.

Second, when allocations for loan waivers exceed budgetary provisions, we see a widening in the fiscal deficit, which has inflationary effects. And there is an opportunity cost here - less government spending on other fronts. The domino effect is annoyed taxpayers because a major chunk of tax revenue goes towards financing loan waivers.

Thirdly, according to the RBI governor, capital expenditure is hit even if allocations for loan waivers are within budgetary provisions. Fewer funds for capital expenditure affects investment in infrastructure and asset creation, even for the agricultural sector. And infrastructural crunch could have inflationary effects as cost of production rises.

What the RBI chief was saying was, though loan waivers set farming families free from debt, they negatively impact credit discipline and incentivise wilful defaulters.

But others point out that RBI data shows 20.83% defaults by corporate borrowers as compared to 6% defaults by farmers, compared to total outstanding.

So while the central government frowns on farm loan waivers, individual state governments have different ideas. State governments in Uttar Pradesh, Tamil Nadu, Punjab, Andhra Pradesh and Telangana have announced loan waivers in 2017-18 and provided for them in their state budgets. Maharashtra and Karnataka have announced waivers outside their budgets. According to newspaper The Hindu, loan waivers announced by these seven states amount to Rs 88,065 crore – 0.5 percent of GDP.  That was in March 2018, before the Karnataka elections.

The spectre hanging on Indian agriculture—debt and suicide

And all this in just the last four years. But farm loan waivers are not new. One Moneycontrol report pointed out that the last time India witnessed a farm debt waiver was in 2008-2009. Then finance minister P Chidambaram announced a Rs 70,000-crore loan waiver package and one-time settlement facility to small and marginal farmers.

And yet the problem doesn’t seem to be resolved. Despite two massive waivers in a decade, many organisations working with farmers in Andhra and Telangana pointed out, the waiver has only benefited big farmers and landowners while leaving out tenant farmers and the landless poor. Entire sections of population who do not have adequate access to crop loans bear the brunt of usurious interest rates charged by local moneylenders. The report also claimed that a big part of agricultural loans get diverted to purposes other than farming.

Loan waivers are primarily meant to discourage suicides by farmers, the apparent reason for which is widespread indebtedness. However, analyses by Bloomberg and Indiaspend claimed loan waivers had little to no impact on suicide rates. This was perhaps because over or 79 million small and marginal farmers, or approx 32 percent, with farm holdings less than 1 to 2 hectares in size, rely on informal sources of credit. Sample this. According to the National Crime Records Bureau, as of March 2017, farmer suicides in Andhra stood at 516 in the year 2015, a stunning rise from the 160 reported in 2014. This figure rose a shocking 152 percent in Telangana to 1,358 deaths in 2015!

In 2007, before the UPA government’s loan waiver for 30 million farmers in 18 states, 16,379 Indian farmers committed suicide, according to NCRB data. Almost a quarter of these deaths were reported in Maharashtra. In 2009, the year after the announcement of the loan-waiver, the state government promised an additional waiver of Rs 6,208 crore. This led to a drop in farm suicides in the state. But in 2010, suicides went up once more by 6.2 percent. Bloomberg reported that by 2015, seven years after the bailout, Maharashtra again recorded 4,291 suicides, its highest rate ever. This was for 34 percent of all such suicides nationwide.

How has loan waiver worked so far?

Add to this, the labyrinthine bureaucracy and public administration in India and not much trickles down to the bottom. A report by the Comptroller and Auditor General of India following the 2008 loan waiver pointed out that 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.

Forbes noted in July 2017 that while the central government was able to resist any temptations towards extra expenditure despite the challenges of a sluggish global economy and inadequate investment demand, within the same period, state governments saw their fiscal balances deteriorate in spite of receiving a higher share of funds from the centre.

Bloomberg noted in 2017 that while such waivers could provide relief for over 32 million indebted farmers, an IndiaSpend analysis of the impact of previous farm-loan waivers indicates such bailouts are inefficient band-aids that fail to address the deeper malaise in India’s agrarian sector. India accounts for 7.68 percent of global agricultural output. And the agriculture sector in India contributes more to the GDP than anywhere else in the world - 6.1%. But it also employs far more people. 43% of the workforce, as per 2017 estimates. In comparison, China, the only country with a comparable population, has 17% of its workforce employed in agriculture.

Bloomberg further stated in its report that between 2008 and 2017, central and state governments together waived Rs 88,988 crore ($13.9 billion) in loans to 48.6 million farmers. The Rs 52,000 crore loan-waiver announced by the UPA government in 2008 occupies the bulk of this figure (calculated at an exchange rate of Rs 45.99 to a dollar, adding up to $11.3 billion.)

Available data suggests that approximately 85 percent of operational farm holdings in India are under two hectares in size. Indiaspend reported that, between 1951 and 2011, the per capita availability of land has declined 70 percent, from 0.5 hectares to 0.15 hectares. This could fall further, according to available ministry of agriculture data. Owners of these shrinking farms tend to find it difficult to use modern machinery and are often unable to afford equipment. And manual labour increases cost.

In addition to this, size and output also limit access to loans and institutional credit. According to Indiaspend, roughly a third of small and marginal farmers have access to institutional credit. That’s around 10.6 million farmers who stand to potentially benefit from debts being written off in the eight states demanding waivers. That still doesn’t help the remaining 22.2 million small and marginal farmers. They depend on moneylenders and extended families for borrowings, according to the 2011 agricultural census and the National Sample Survey Office’s 2013 situation assessment survey of farm households.

In a 2007 report quoted by Indiaspend, economist R Radhakrishna said indebtedness is merely a symptom and not the root cause of the farm crisis. Borrowings by the average farming household haven’t been “excessive”, his report claimed. The factors contributing to the crisis in agriculture, according to the report, are “stagnation, increasing production and marketing risks, institutional vacuum and lack of alternative livelihood opportunities.”

As much as seven percent of India’s total grain output, 10 percent of seeds and 25-40% percent of fruits and vegetable go to waste each year due to lack of effective storage and supply-chain infrastructure, according to a 2015 report. Irrigation is also not up to scratch. Estimates claim less than 48 percent of India’s farms are irrigated, and growth in the net-irrigated area until 2010 was 0.3 percent. Such lack of support makes farming expensive and keeps prices volatile.

The Situation Assessment Surveys of the National Sample Survey Organisation showed that 52% of farm households in India were in debt in 2013.

Band-aids insufficient; Larger reforns essential

On the flipside, as we’ve observed, farm loan waivers are detrimental to the economy, however unpopular that inference may be. Some time ago, Arundhati Bhattacharya, chairperson of SBI, had a privilege motion was moved against her in the Maharashtra assembly after she said the farm loan waiver leads to credit indiscipline - talk about an occupational hazard.

Bhattacharya was not wrong. A 2015 ICRIER paper noted that massive write-off of loans in 2008 took a toll on banks, increasing the NPAs of commercial banks threefold between 2009-10 and 2012-13.  Yet, farm loan waivers make for political profits and no politician in India will decry such waivers.

As one analysis noted - agriculture, as a sector, requires large investments in areas like irrigation, water conservation, better storage facilities, market connectivity and agricultural research. Many experts have suggested the implementation of the National Commission on Farmers (NCF). It suggested 'faster and more inclusive growth' for farmers.

The Swaminathan Commission, chaired by MS Swaminathan, had recommended MSP for grains, protection of small farmers and addressal of risks in overtaking agriculture as a profession. The commission observed that farmers need to have access over resources such as land, water, bio-resources, credit and insurance, technology and markets and that agriculture needs to be shifted to the concurrent list instead of the state list at which it is currently at.

The issues in the agri sector are structural and require long-term solutions. While they are politically expedient, the consensus seems to be that loan waivers complicate existing problems. India’s economy has suffered due to competitive populism in the past and it is high time governments addressed the real issues facing the agriculture sector.