Farm Loan Waiver:

Context: Governments in newly elected states of Madhya Pradesh, Chhattisgarh and Rajasthan have announced loan write-offs for small and medium land-owning farmers and last year Uttar Pradesh, Maharashtra, Karnataka and Tamil Nadu announced farm loan waivers.

Farm loans may be crop loans or investment loans taken to buy farm equipment. Both farmers and banks benefit from a good harvest when all is well.

Need of loan waivers:The need of providing loan waivers arises due to following factors:

  • Skewed procurement: Physical procurement by FCI is conducted only for rice and wheat leaving out other crops.
  • Rainfed agriculture:Around 52% farm area is still unirrigated and dependant on rainfall, while drip irrigation and sprinkler is limited to 1.6 per cent and 0.8 per cent families respectively.
  • Informal credit disbursal:Non-institutional credit to agriculture is around 40%, which not only has exorbitant interest rates but also is exploitative resulting in reduced farm incomes and increased farmer suicides.
  • Problem of surplus or cobweb phenomenon: After the prices of an agricultural commodity shoot during a season of scarcity, farmers resort to boosting the production on the premise of the pre-existing demand and prices, leading to a problem of plenty in the next season when prices of the same commodity are at alow.

But the immediate factors which trigger the demand of loan waivers are:

  • Minimum support prices: Only 22 crops are covered under MSP scheme and only about 10% farmers are aware of existence of MSP. Also when market prices fall below MSP, a majority of farmers who sell produce directly to markets are affected.
  • Compensation: State compensation to farmers via State Disaster Response Fund (SDRF), National Disaster Response Fund (NDRF), during a distress year falls short of the required amount, which causes loan defaults.
  • Insurance: Less than 24% of the gross cropped area (against a target of 40%)is covered under government-run crop insurance schemes crippling farmer’s capacity to realize revenues.

Governments usually announce loan waivers in the entire state and often use it as a populist tool to secure their vote share without considering the economics of the decision.

Demerits of loan waivers:

  • Temporary relief: Loan waivers are a temporary relief for farmers limited to one financial year and does not address the structural problems of agriculture.
  • Promotes credit indiscipline: Even those who can afford to pay may not repay loans in the expectation of a waiver. Farmers turn into deliberate defaulters in the hope that their loans will be waived sooner or later.
  • Strips farmers of other benefits: Farmers defaulting in anticipation of waivers, lose out on other benefits too. For instance, accounts of many farmers anticipating waivers were sub-standard at the time of enrolment under PMFasalBimaYojana and, thus, the compulsory coverage was not extended to them.
  • Moral hazard:Loan waivers create a moral hazard as they penalize those farmers who pay loans and also affect tax payers.
  • Leads to fiscal deficit: Loan waivers make a dent in the finances of the government as it has to repay banks and higher fiscal deficits in future may not be offset by higher GDP gains, as per RBI report on State Finances.
  • Discourages banks to lend:By eroding credit discipline, loan waivers make banks wary of lending to farmers in the future, as it affects their balance sheets and affect their stocks in markets.
  • Decreases capital expenditure:Loan waivers affect state’s capacity to invest in creation of capital assets and lead to crowding-out of private investment.
  • Cascades indebtedness: Reduction in bank credit following waivers forces farmers to approach informal sector lenders, which increases indebtedness as such loans are expensive.
  • Populist tool: Loan waivers are used by political parties as a tool to influence voters during elections, despite proven long-term ineffectiveness of this measure.
  • Provides relief to few farmers only:Small and marginal farmers constitute around 86% of all farmers in India and as per Niti Aayog, among this sectionthose who avail themselves of institutional loans, are very few, in some states about 25% only,which is alos the reason behind failure of loan waivers.
  • Loans misdirected and lack review:A NITI Aayog study highlighted that in some States, about three-fourths of the farm loans were being used for consumption instead of meeting agricultural needs, without any evidence of increase in investment and productivity of beneficiary households.

Short term measures to offset the effect of loan waivers:

  • Waiving only a portion of loan: Waiving only a portion of the loan instead of placing a cap on the quantum of loan waiver will be an improvement towards averting moral hazards.
  • Fixed cash subsidy per acre: Instead of loan waivers government may provide a fixed cash subsidy per acre, by digitizing and identifying plots, as demonstrated by RythuBandhu Scheme of the Telangana government, which would cover all farmers.
  • Prohibiting loan waivers during elections: The Election Commission should prohibit announcement of loan waivers at the turn of elections to stem this populist practice.
  • Dismantling the informal credit-crop nexus (arthiya system): Freeing the farmers from the tyranny of middlemen by reforming the commission agent system and promoting formal financial inclusion of farmers to bring them into direct contact with state institutions as around 40% credit to agriculture is non-institutional.
  • Restructuring loans: Instead of waiving loans, banks can restructure farm loans as done by NBFCs. This ‘restructuring’ will allow farmers to take a loan for next crop, and then start repaying both loans together, which will have different tenures, without affecting state deficits.
  • Improving insurance penetration:As there is less than 24% of the gross cropped area (against a target of 40%)covered under crop insurance, FasalBima Yojana should be expanded to reach the target of 50% coverage by 2019.
  • Aligning export policies with domestic production: During a surplus, export traiffs should be automatically reduced and during low production a cut in import tariffs should automatically click in for effective price realization of farmers without any need of government intervention.
  • Targeted action:To obviate the need of announcing loan waivers for whole state, government must focus on 29 highly vulnerable and disadvantaged districts suffering from low income and high climate vulnerability through specialprogrammes.
  • Futures trading: Promoting the culture of futures trading among Indian farmers through local awareness and information dissemination can ensure fixed and guaranteed food prices, while also spurringformalisation in agriculture.
  • Supportive schemes: Schemes like BhavantarBhugtan Yojana (price difference payment scheme) launched by Madhya Pradesh government which covers eight kharif crops, assure affirmative action by the state and similar programmesshuld be launched at national level covering majority of crops.

Long term steps which could eliminate the need of loan waivers:

  • Crop diversification:Combating credit risk in the farm sector rests also on crop diversification and cross-holding of risks between agriculture and allied activities, such as animal husbandry.
  • Tenancy reforms and land consolidation and FPOs: Land consolidation and formation of Farmer Producer Organisations would give more bargaining power to farmers and when coupled with tenancy reforms, this would ensure legal status to tenants along with security of tenure. Kerala is the only State that has a tenancy law in place with an implementation mechanism.
  • Cooperative farming and push to agro-processing sector:Cooperative farming will allow small and marginal farmers to take the advantage of their family labour and allow economies of scale to kick in at lower thresholds, thus raising farmer incomes.
  • APMC to APLM: States must adopt the model Agricultural Produce and Livestock Marketing (Promotion and Facilitating) Act (APLM), 2017, to promote agriculture livestock marketing along with overhaul in APMC acts.
  • Farmers to agripreneurs: Niti Aayog in its 2022 strategy has proposed further expansion of e-NAM to convert farmers into agripreneurs by incentivizing them to undertake agriculture entrepreneurship activities.
  • Integration of agriculture with industry: Primary producers should be integrated with both manufacturing and marketing activities and subsidies and tax concessions given to corporate sector should be given to rural entrepreneurs who are willing to start manufacturing firms that will process local raw materials and employ rural labour.
  • Reform in procurement: Government must ensure procurement and price stabilization mechanisms for other commodities also apart from wheat and rice.

‘The Right To Assured Price For Agricultural Produce Bill, 2017’ is a draft bill formulated by farmer organisationswhich contains provisions for reforming the agricultural policies and aims at Assured Remunerative Price for commodities. It would be prudent on the part of policymakers to take the bill for discussion in the Parliament.

Model Case study:
Kerala State Farmers’ Debt Relief Commission: Under Kerala initiative, a Commission was established in 2007 and its seven-member team of farmers, legal experts, farm economists, political appointees and others went from village to village, spoke to farmers, screened their loan portfolios and decided on the quantum of relief.Within two years, farmer suicides had fallen sharply.
Instead of bulk farm loan waivers, this is a continuous engagement. Round the year someone is talking to farmers, trying to understand what they are going through and how the state can help.
The relief provided by the commission is not unconditional:
• The loan should be from the cooperative sector, which provides the bulk of farm loans;
• The applicant should be a small or marginal farmer, who owns or has taken on lease a crop area of less than five acres;
• The applicant’s annual income should not be over ₹2 lakh.
• The commission sits for several days in a village every month.
• In this way benefits reach the needy and this model can be emulated by other states too.


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