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May 05, 2017 @ 01:46 PM

May 05, 2017 @ 01:46 PM

Farm Loan Waiver: A Political Gimmick or An Agenda Of Agriculture Reforms

Farm Loan Waiver

Published : Tuesday, 11 April, 2017 10:00 AM

Farm Loan Waiver: A Political Gimmick or An Agenda Of Agriculture Reforms

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Read Current Affairs Topic:  Farm Loan Waiver: A Political Gimmick or An Agenda Of Agriculture Reforms

Before the assembly elections of Uttar Pradesh (UP), the Bhartiya Janta Party (BJP) had promised in its manifesto to wave off the farmers’ loan in its very first cabinet meeting after winning the elections. The BJP got unprecedented victory in UP in the recent decades and as per its promise, it waived off the farm loans of up to INR100,000 of the small and marginal farmers in its first cabinet meeting on April 4, 2017. The decision is expected to benefit around 21 million farmers. The cabinet also decided to write off INR56.30 billion non-performing assets (NPAs) of around 700,000 farmers. These twin waivers together will cost the government around INR364.59 billion.

Under the priority sector lending scheme, the banks have to earmark 40% of their total loan and advances to the agriculture and allied sector. In case of any shortfall in the priority sector lending by the banks, the remaining amount is parked in the Research and Infrastructure Development Fund (RIDF) of National Bank for Agriculture and Rural Development (NABARD).

There are around 23 million farmers in UP out of which an overwhelming majority of 21 million is of small and marginal farmers. However, the latest decision of loan waiver will have a limited impact on their hardships because it is applicable only on the crop loans of up to INR100,000 only. The crop loans are given for raising a crop and had to be repaid in 18 months. Other types of loans like loans against warehouse receipts, produce marketing loans, KCC-based loans, investment loans, etc are also substantial and these loans have been left untouched.

Secondly, whatever the little impact it may create, it will not be able to transform the agriculture in UP which is plagued by several structural anomalies. The major elements of the agriculture crisis in the state are rising input costs, decreasing price of produce, increasing vagaries of the climate resulting in crop failures etc. The loan waiver will hardly effect any of these issues.

This decision will also adversely affect the health of banks and will result in spurt in NPAs as it will incentivise the people to stop paying their dues. Also in the long term, banks will be reluctant in providing fresh funding to the farmers who have once availed the waiver. According to some senior bankers, the loan waiver scheme of UPA in 2008 and the subsequent waiver by Telangana and Andhra Pradesh governments in 2014 had disastrous effects and it took years to clean the mess and rebuild the trust between the borrowers and banks.

Since the loan waiver is not announced by the central government but by the state government, the latter would have to compensate the banks which will ultimately deteriorate the fiscal situation of the state government. Past evidences suggest that such compensation by the state government never reached the banks on time and thus it aggravated the burden of the banks. The cost of the waiver, along with loss of revenue from other politically inspired measures such as banning of slaughter houses will return to haunt the state’s finances sooner or later.

Now coming back to the agriculture sector, the piecemeal approach of loan waiver is not a beneficial thing in the long run. Instead, if government promises free supply of fertilizer, seeds, equipment, irrigation and warehouse facility, it will help in improving the agriculture productivity.

The agriculture which provides the livelihood to around 50% of the labour force has merely 17% share in the GDP. Therefore, by increasing the productivity of the agriculture sector, government can improve the lives of around 50% of its labour force. For ushering the New India, the urgency of reforms in agriculture sector is second to none and it can be done only by enhancing the rate of capital formation, removing the over dependence on monsoon, land development, assured power supply (particularly during the sowing season), warehouse facilities, access to markets etc. Apart from this, government should also endeavour to create jobs in other sectors so that surplus labour from the agriculture can be transferred to the other sectors.

The loan waiver can be good political tool to win the elections but in the long run, it will fail to give even political returns because its harmful effects would become too big to ignore. Already, demands have started coming from other states for similar waiver and it will become tough for the political parties to resist. Instead of promising the loan waiver, government can promise the rescheduling of loans.

It is true that government must do something to curb the rising farmer suicides but the piecemeal approach of loan waiver will do little. For that matter, the most importantly, government should first try to get 100% financial inclusion so that farmers does not need to go to the private moneylenders who charge exorbitant rate of interest. And then, a holistic approach is required to ensure the regular supply of income to the farmers. Most common cause of non-repayment of debt by the farmers is crop failures. So the government must make efforts to minimise the crop failures and the post-harvest losses, ensure the access to the markets and suitable price of the produce.

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