Farm Loan Waivers

Last Updated: Feb 2023

Farm Loan Waivers

This article deals with ‘Farm Loan Waivers.’ This is part of our series on ‘Economics’, which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

Earlier Farmer Loan Waivers

1990 VP Singh Government waived loans of farmers up to ₹10,000.
2008 Manmohan Singh Government waived loans of farmers costing 52,000 crores to exchequer. Due to loan waivers, the Congress government was re-elected, setting a bad precedent for various state governments.
2016 to 2020 State governments like Punjab, UP, Karnataka etc., have announced various loan waivers for state farmers due to tremendous pressure from farmer lobbies.

Arguments in Favor

  • Economic Survey 2020 opined that peasant borrowers suffer from a problem of “debt overhang”. It refers to a situation where the borrower’s current income is used up in repaying the accumulated debt, leaving little incentive to invest either in physical or human capital. Debt waiver can clean up the borrowers’ balance sheet and is likely to lead to new investments and an increase in demand as disposable income in the hands of farmers will increase. 
  • Industrialists are given significant cuts in case the Industrial sector faces stress. Hence, farmers should also be given a cut on loans when the agriculture sector faces stress. The agriculture sector has been facing tremendous pressure since demonetization due to a decrease in demand and a rapid fall in the prices of agricultural commodities.  
  • Farm Waiver can help to solve the issue of farmer suicides due to their inability to pay loans.

Problems with Loan Waivers

Farm Loan Waivers
  1. Loan Waivers create a moral hazard for borrowers, who have no incentive to stick to credit discipline. Economic Survey (2020) noted that the 2008 waiver by the Government of India led to increased loan defaults on future loans. Economic Survey (2020) was of the view that waiver helps only when the beneficiaries are genuinely distressed but fuels even greater default when relief is not made conditional to genuine distress.
  2. It adversely impacts the banking sector’s health, especially when they are suffering their huge NPA problem.
  3. Schemes are prone to serious exclusion and inclusion errors. Loans from non-institutional sources ( 44%) are not covered. 
  4. It could lead states to violate their FRBM targets. E.g., the UP waiver cost the government ₹ 36,000 crores. In Punjab, Loan Waiver constitute 0.83% of GSDP (Punjab Budget 2018).
  5. Crowding out impact: Farm waivers could squeeze out private spending by firms.  
  6. Domino Effect: Farm waiver by one state forces other states to imitate this, opening the Pandora Box. 
  7. Due to farm waivers, the government fails to develop the agricultural infrastructure. For example, in 2016-17 alone, a cumulative sum of Rs 3.1 lakh crore was given as loan waivers in India, an amount that could have increased India’s irrigation potential by 55%.
  8. The farmer who will get a farm waiver will become non-creditworthy in the eyes of the bank. 

Way forward

By giving loan waivers, Governments are just trying to correct the symptoms of the crisis without paying serious attention to the root cause of the underlying crisis. The best way out can be 

  1. Implementation of Swaminathan Report.
  2. Encourage livestock to supplement their income.   
  3. Promote Pradhan Mantri Fasal Bima Yojana to create a safety net in crop loss.
  4. Increase the resilience of Indian agriculture by building irrigation infrastructure.

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