The reports of the district administration ordering auction of the land of several farmers in Rajasthan to recover from them the dues of public sector banks (PSBs) are shocking. The land is the only asset that a farmer especially small and marginal has and if it is taken away, this will lead to permanent incapacitation impairing his/her ability to earn a livelihood all through his/her life time.
The dues had piled up because the farmers did not pay back as during the campaign in the run up Assembly elections in the State (2018), the then President, Indian National Congress (INC), Rahul Gandhi had promised loan waiver and that too within ten days of the INC-led Government taking charge. But, it has not kept the promise – not even after completing half of its term – leading to the present horrific situation.
Congress is not alone in offering farm loan waiver. Almost every major political party including BJP led by Modi (who has time and again harped on shunning doles and empowering the poor) have promised this in the run up to elections. In Uttar Pradesh (2017), he had promised to waive loans for all small and marginal farmers and to extend fresh credit at zero interest rate (as against 7% applicable and 4% for those paying back in time). He also vowed to clear all outstanding arrears of sugarcane farmers.
Other states where elections were held last (between 2017 and 2019) and loan waivers worth tens of thousand crore promised are Maharashtra, Punjab, Chhattisgarh, Madhya Pradesh etc. There is an urgent need to ponder over the implications of such a reckless trend for various stakeholders.
Fundamentally, a loan waiver is granted under excruciating circumstances say, (i) an unprecedented drought/floods or (ii) a massive pest attack which results in either the farmers facing drastic reduction in output, or extensive damage to the crop. Such circumstances arise once in a while and are exception to the normal. But, what we see is exception becoming the normal!
Every time an election is due (India is privy to State Assembly elections every now or then – besides General elections once in 5 years), political parties come up with an offer of farm loan waiver. The sole intent behind this is to allure farmers (they play a decisive role in most of the constituencies) rather than being a manifestation of any genuine concern for them.
This drastically changes the mindset of farmers to a point whereby they get attuned to expecting a loan waiver each time an election is held. So, they stop paying back; even farmers who can to pay back (those who have sufficient surplus left after meeting expenses on growing crop) join this bandwagon. This is dangerous as it gives rise to a cult of non-payment – a potential source of creating huge NPAs (non-performing assets) especially of PSBs.
The very thought of non-payment must not even cross our mind as this strikes at the very foundation of sustainable banking. Perhaps, one could condone this only for the small and marginal farmers with land holdings up to two hectares who are under acute financial distress most of the times. But, the irony is that generally loan waivers don’t make a distinction even as every farmer having dues is eligible.
According to a study by the RBI’s internal working group (IWG), during 2016-17, large farmers with holding over 10 hectares got away with 41% of the crop loan (these are short-term loan used for financing purchase of agri-inputs) even as they account for a mere 0.6% of the total number of farmers. Semi-medium and medium farmers, owning between 2 – 10 hectares (they are 13.2% of all) got bulk of the balance 59%. At the other extreme, small and marginal farmers (they are 86.2% of the total number) got very little; in fact, nearly 41% of them don’t even have access to banks.
Even with regard to investment credit (this is essentially long-term used for building assets), a big chunk of this also goes to medium and large farmers. According to the committee on “Status of Farmers’ Income: Strategies for Accelerated Growth,” (its mandate was to identify ways to double farmers’ income), small and marginal farmers finance 30.8% and 52.1% of their investment in assets respectively through informal sources such as moneylenders, traders and input dealers and so on as they don’t have access to banks.
In view of above, be it crop loan or investment credit, a predominating share of bank loans go to medium and large farmers even as the small/marginal farmers are literally made to sit on the fence. Sadly, as brought out in the study by the RBI’s IWG, the former having borrowed from banks at low rates (4% being the effective rate applicable to agri – loan), lend this money to the latter at a much higher rate, thereby making a huge profit from arbitrage.
The IWG study also brings out that, in several States, the quantum of crop loan was higher than the value of all agri – inputs (in Andhra Pradesh, during 2015-2017, this was 7.5 times the value of agri-inputs). Considering that crop loans are taken mostly for buying agri-inputs, when the value of the former exceeds the latter, it clearly points towards diversion of funds to non-farm uses.
In such a scenario of bulk of the bank credit being cornered by medium and large farmers, when a loan waiver is granted, a disproportionately high share of its benefit will also go to them. Furthermore, to an extent credit (albeit concessional) meant for farming is appropriated by non-farmers/ unscrupulous persons, they also gain from the largesse announced by the State government.
The intended relief is not going where it should. At the same time, it imposes a huge burden on the budget of States impairing their ability to stick to fiscal deficit (FD) mandated under the Fiscal Responsibility and Budget Management (FRBM) Act. Being an offshoot of a promise made in an election and at the whims and fancies of the party making it (not backed by any planned exercise), the resultant liability and impact on FD is totally unpredictable and uncontrollable. It makes a mockery of fiscal consolidation exercise, if any.
Yet, forced by the rigor of FRBM Act and compelling need to keep expenses under check, some States resort to disingenuous methods to avoid honoring the promise. For instance, in Rajasthan, the Government now argues that the loan waiver was meant only for farmers who had taken loans from cooperative banks (curiously, no condition was mentioned by Gandhi when he made the promise).
In case of loans taken by farmers from public sector banks (PSBs), the State even wants the latter to write off this debt. A similar demand was made by Telengana some years back in a representation made to the RBI. This tantamount to increasing the FD of the Union Government as eventually it has to give budgetary support to the PSBs whose capital gets eroded due to the write off.
To conclude, farm loan waivers largely benefit the undeserving, bring States and central budgets under stress, add to the NPAs of banks and harm the economy. Above all, this is a sort of corrupt practice as by promising it, parties entice voters leveraging resources of the state. The States should shun this unhealthy practice, if need be, the Centre should pass a law to make it happen.