Farmers' Protest: Why was farm loans waived only twice since Independence? Experts see a vicious cycle

Farmers protest LIVE

The ongoing farmers' protests along the Punjab-Haryana border, which started on February 13, have highlighted a set of demands put forward by the agricultural community. Among other demands, farmer unions have been advocating for:

(1.) Complete waiver of agricultural loans.

(2.) Provision of a monthly pension of Rs 10,000 to all farmers and farm labourers aged 60 and above.

Citing government records revealing a staggering total agricultural debt of Rs 18.5 lakh crore, farmer leader Sarwan Singh Pandher has asked the Centre to announce a waiver of farm loans, deferring the specifics of the mechanism for future discussions.

Economists Sound Alarm Over Fiscal Impact of Loan Waivers

However, economists caution that determining the fiscal implications of such a measure remains challenging due to the lack of clarity surrounding the definition of a complete loan waiver. Key considerations include whether it exclusively addresses existing debts or extends to future loans.

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Loan Waiver: Political Tool or Economic Necessity?

Loan waivers do carry a clear political motive, and it could be argued that they also serve to ease the debt burden and empower farmers to reinvest, potentially boosting productivity in the long run. However, the reality is more complex. Loan waivers can foster moral hazard by incentivising borrowers to default on their obligations. According to the report on Trends and Progress of Banking in India 2022-23 (FY23), released by the Reserve Bank of India (RBI), the gross non-performing asset (GNPA) ratio of scheduled commercial banks (SCBs) remained the highest for the agricultural sector and the lowest for retail loans as of end-September.

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Loan Waivers' Ripple Effect

Loan waivers can have far-reaching consequences that extend beyond their immediate beneficiaries, impacting the entire credit ecosystem. Reports demonstrate that states implementing loan waiver policies often witness a rise in non-performing assets (NPAs), which disrupts credit discipline.

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Dampening Farmer Access to Credit and Weakening Govt Finances

Banks tend to become more hesitant about lending to farmers in states with a history of loan waivers, fearing a recurrence of defaults and subsequent waivers. This caution can limit farmers' access to formal credit channels, pushing them towards informal sources with higher interest rates, thereby increasing their financial vulnerabilities.

Additionally, the fiscal burden imposed by loan waivers strains government finances, diverting funds away from critical sectors such as infrastructure, education, and healthcare. This imbalance in fiscal management can put a brake on long-term economic stability and hinder development efforts, according to experts.

More significantly, given the limited fiscal space of governments, debt waivers impose constraints on the state's ability to allocate resources towards critical investments, including those in the agricultural sector. This constraint has the potential to deliver a significant blow to productivity growth over the medium term.

Pitfalls of Farm Loan Waivers in India's Agricultural Sector

Farm loan waivers are often viewed as a quick fix to address the challenges confronting India's agricultural sector. However, they tend to raise rather than resolve the underlying issues. Loan forgiveness encourages farmers to take on more debt than necessary, banking on the expectation of eventual waiver under political pressure. This practice undermines the integrity of the agricultural credit system.

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When state governments fail to reimburse banks for the losses incurred due to toxic loans, financial institutions face strain and may curtail lending activities. This leaves farmers, who rely heavily on credit, in a precarious financial situation. Furthermore, states prioritising loan waivers over critical investments and capital formation often encounter budgetary constraints.

Insights from Economists on Employment Opportunities

Economists suggest the government should focus on stable employment opportunities beyond agriculture. By doing so, surplus labour from agriculture can find jobs elsewhere, easing the pressure on agricultural productivity. Instead of primarily relying on temporary measures like farm loan waivers, policymakers should prioritise efforts to bolster non-farm sectors.

Investing in industries such as manufacturing, services, and technology not only broadens the economy but also offers new job prospects for those transitioning from agriculture. This strategy encourages long-term economic growth, diminishes dependence on agriculture, and tackles the key problems impacting the sector.

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Nationwide Loan Waiver Programmes Since Independence

After Independence, India has seen only two nationwide loan waiver programmes: one in 1990 and the other in 2008.

The Agricultural and Rural Debt Relief Scheme (ARDRS), introduced during the 1990-91 Budget under the VP Singh-led National Front government, is noteworthy in India's economic history as the first central government-led loan waiver scheme.

“Over the years, poor farmers, artisans and weavers have accumulated debt which they are unable to repay. They have been caught up in a vicious circle of indebtedness and low incomes which keeps them in perennial poverty. In order to relieve our farmers from the burden of debt, an assurance was given in the National Front’s manifesto that relief will be provided to farmers with loans upto Rs.10,000 as on 2nd October, 1989. I am glad to inform the House that we are now ‘ ready with the scheme of implementation of debt relief to fulfil the promise, and redeem the pledge given to the kisans and artisans,” the then finance minister Madhu Dandavate had said in his Budget speech.

1990 Debt Relief Scheme: A Closer Look at Costs

The waiver scheme incurred a cost of Rs 7,825 crore for the government and benefited 3.2 crore borrowers. Approximately 53 percent of borrowers in the agricultural sector were assisted by this scheme, resulting in the remission of about one-third of the total outstanding farm loans, according to a National Bank for Agriculture and Rural Development (NABARD) report.

Govt Unveils Rs 60,000 Crore Loan Waiver Package

After a gap of 28 years, the government introduced the second central loan waiver. With an eye on the upcoming general elections, the government revealed a substantial package of Rs. 60,000 crore aimed at easing the financial burden on the farming community. This package included forgiving loans of small and marginal farmers. The then finance minister P Chidambaram announced the scheme for debt waiver and relief for farmers during the presentation of the Union Budget 2008-09 in the Lok Sabha.

Govt Introduces OTS Scheme for Farmers

Additionally, the Centre unveiled a one-time settlement (OTS) scheme for remaining farmers, offering a 25 percent rebate on their outstanding loan balance if they pay the remaining 75 percent. This OTS relief for overdue loans was expected to incur a cost of Rs 10,000 crore to the exchequer.

Loan Waiver Impact

The timing of waivers has been identified as a crucial factor influencing the correlation between waivers and electoral victories. Proximity to elections was found to be significant, with parties gaining greater political mileage when the announcement of waivers was closer to elections.

According to the data from the NABARD covering the period from 1987 to 2020, political parties that had announced or introduced a loan waiver scheme subsequently lost only 4 out of 21 elections.

Farmers' Income Surges 1.3 to 1.7 Times in FY22

According to a report by SBI Research, farmers' income has experienced substantial growth, averaging between 1.3 to 1.7 times in FY22 compared to FY18 levels. Moreover, grain exports saw a remarkable surge, surpassing $50 billion during this period.

In particular cases, such as soyabean in Maharashtra and cotton in Karnataka, farmers' income more than doubled in FY22 compared to FY18 levels. For other crops and states, the increase in income ranged from 1.3 to 1.7 times over the same period.

A key factor driving this growth is the consistent upward adjustment of minimum support prices (MSPs) to reflect market trends. Since 2014, MSPs have seen a massive hike, ranging from 1.5 to 2.3 times their previous levels. This rise has been instrumental in ensuring that farmers receive better prices for their produce and facilitating more accurate price discovery mechanisms.