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A waiver to woo~I

It is not loan waivers but their consequences that are of real concern. They do help some farmers, but only in the short term. They invariably fall back to debt soon again, because the waivers do nothing to address the deep-rooted structural problems of agriculture in India which cause such indebtedness in the first place.

Govind Bhattacharjee |

In an article titled “A Populist Waiver” (5 May 2017), I had examined the pitfalls of the farm loan waiver of Rs 36,000 crore given by the newly-elected BJP Government in UP in April of that year. It was a stupid replay of Congress-style populism, forgetting the high indebtedness of UP.

I had predicted that it would only be a matter of time before such waivers became an all-India norm. Now, after the victory of the Congress in the recent Assembly elections in Madhya Pradesh, Chhattisgarh and Rajasthan, farm loan waivers are being granted in every state. I expect such waivers to be a right-based national programme, like the MNREGA, soon after the 2019 Lok Sabha elections, irrespective of the party that assumes power.

This has already been promised by Rahul Gandhi. The Congress has always revelled in such populism, and considerations of realpolitik would ensure the endorsement of this policy by the BJP and all other parties, ignoring fiscal and economic considerations. In fact, the “race to the bottom” has already begun.

Rahul Gandhi has warned that he won’t let Narendra Modi “sleep at night” till he announces a nationwide agricultural loan relief. His promise of loan waivers at a rally in Mandsaur on June 6 was immediately followed by a 10 per cent fall in farm loan repayments in MP.

Research, based on SBI’s loans to agriculture, showed that whenever a loan-waiver was announced, bad loans soared. It shot up from 6.4 per cent before UP announced its loan-waiver to 11.4 per cent in September 2018. In anticipation of loan-waivers before elections, borrowers willfully start defaulting on repayments irrespective of their ability to pay.

In the politics of vote-banks and race to power, our leaders are always too eager to compromise anything, including the nation’s welfare and resources. The new MP Chief Minister, Mr Kamal Nath, has criticised economists opposed to the waivers by saying that when nationalized banks could write off 40-50 per cent loans of big industrialists, why couldn’t cultivators get the same relief? So once a sin has been committed, it will continue to be committed and legitimized even if goes against fiscal prudence.

The first ever nationwide farm loan waiver was announced in 1990 by the VP Singh Government. It cost the government Rs 10,000 crore. But the genie was really uncorked by the UPA’s Finance Minister, Mr P Chidambaram, when he waived a whopping Rs 52000 crore of farm loans in his 2008 budget, ahead of the 2009 general elections that returned the UPA to power.

The loan-waiver may or may not have played any part in UPA’s election victory, but a dangerous precedent was set for governments that are perennially short of ideas and think only in the short term. Since then state after state had followed this pernicious precedent, beginning with Andhra Pradesh that waived farm loans to the tune of Rs 43000 crore in 2014.

Between 2014 and 2017, seven other states had waived farm loans: UP (Rs 36000 crore), Maharashtra and Karnataka (Rs 34000 crore each), Rajasthan (Rs 20000 crore), Telangana (Rs 17000 crore), Punjab (Rs 10000 crore) and Tamil Nadu (Rs 5800 crore). Now the newly-elected Congress governments, fulfilling their election promises, have waived farm loans of Rs 35000 crore in MP, Rs 18000 crore in Rajasthan and Rs 6100 crore in Chattisgarh.

Not to be left behind, the BJP Government in Assam has announced a Rs 600-crore scheme of loan waivers and interest- free loans to farmers through Kishan Credit Cards. Gujarat has announced a Rs 625-crore waiver of 6.22 lakh rural electricity bills including those of farmers, and Odisha has just announced a Rs 10180- crore assistance to farmers. More states are likely to follow suit.

The contagion is spreading like cancer in our body politic, with competitive populism forming the bedrock of the political agenda of all parties spelling an end to austerity and fiscal prudence. In the run-up to the 2018 elections, the total loan waivers have been estimated to touch Rs 4 lakh crore, which is 2.5 per cent of our GDP and about a quarter of all agricultural and crop loans given by banks.

Once uncorked, there is no way to put back the genie in the bottle again. The farm sector being non-taxable, the cost of such huge waivers, whether underwritten by banks or governments, has to be borne only by the non-farming taxpayers, while it benefits only a small section of the small and marginal farmers because of their functioning.

As regards design, the waivers are limited to bank borrowings only, but according to the NSSO 70th Round Survey, the majority of small and marginal farmers are indebted to informal or non-institutional lenders like local moneylenders, traders, or big farmers; they cannot get the benefits of any waiver.

Further, the smaller the land holding of a farmer, the less likely he is to get a bank-loan. An estimated 85 per cent of the marginal farmers with less than 0.01 hectare of land borrow from non-institutional sources, mainly money lenders (64 per cent). This percentage gradually decreases to 35 per cent for small farmers (with holdings between 1-2 hectares). Thus the intended objective of providing relief to small and marginal farmers in distress remains a myth.

As regards delivery, the 2008 UPA loan-waiver scheme was audited by the CAG, whose report revealed serious lapses and deficiencies. Out of 3.73 crore farmers who were given debt relief, CAG had test-checked some 90000 cases, and found serious lapses in 22 per cent of them.

Thousands of ineligible farmers received benefits of the waiver while deserving farmers were left out; benefits were irregularly extended to microfinance institutions and banks in gross violation of the guidelines. Tampering of records was widespread. The BJP, then in opposition, demanded a CBI inquiry at that time, terming this as “a big fraud committed on the nation” involving a “huge scam of Rs 10000 crore.”

To be fair, farm loan-waivers may not be as big as they are made out to be. The medium and large industrial houses which constitute only 10 per cent of the Indian workforce account for more than 55 per cent of the stressed assets of the banks, while the agriculture sector which employs 50 per cent of the workforce account for just 8 per cent of the NPAs.

It is not loan waivers but their consequences that are of real concern. They do help some farmers, but only in the short term. They invariably fall back to debt soon again, because the waivers do nothing to address the deep-rooted structural problems of agriculture in India which cause such indebtedness in the first place.

All such waivers vitiate the credit culture and loan discipline, and encourage willful default in expectation of a future bailout. They discourage repayment, nudge honest borrowers into dishonesty and promote a culture of irresponsibility all the way.

They also slow down bank lending, because once the repayment cycle is disrupted, banks do not get enough funds to lend in the next cycle, inhibiting credit and investment down the line. It is the farmers who ultimately are affected in the process, because banks become weary of lending to a farmer who has not repaid his loans, who is now forced to fall unto the caprices and clutches of the moneylender. So the moneylender becomes the ultimate beneficiary of the waiver which increases his power over the hapless farmers.

In September 2017, the RBI had warned that such waivers, being essentially a transfer from taxpayers to borrowers, would have a long-term impact on state finances by pushing up borrowings and borrowing costs. Once the government borrowing increases, yields on the state development loans automatically firms up posing higher interest burden for the states by crowding out private borrowers and increasing the cost of borrowing for others which adversely impacts growth all over.

The impact of waivers on state finances is hazardous, to say the least. Since the Centre has wisely refused to provide any relief to the states for such waivers, states have to raise the necessary finds through market borrowings. All these states already carry a huge debt burden, and the ratio of outstanding liabilities to the state income (GSDP) is dangerously high for some states.

As per the budget estimates of 2018-19, this ratio is 41.5 per cent for Punjab, 33.6 per cent for Rajasthan, 26.3 per cent for UP, 25.5 per cent for MP and 27.3 per cent for Andhra Pradesh. By adding to their already high debt service payments which will progressively eat into their development funds, loan-waivers will put enormous burden on their finances. Punjab in fact is finding it difficult to carry out its promised loan waiver.

Some countries, notably Mexico and Turkey had implemented a Direct Income Support (DIS) scheme to help farmers. Mexico’s PROCAMPO (Program for Direct Assistance in Agriculture) came in response to North American Free Trade Agreement (NAFTA) in 1994.

The trade liberalisation led to a sharp decline in domestic prices of certain crops produced by Mexican farmers who were unable to compete with US and Canadian exports, and PROCAMPO provided compensatory income transfer to these crop producers. The programme, designed as a 15-year transition towards free trade, helped farmers by reducing their average loan size substantially from 534 pesos to 377 pesos per hectare between 1994 and 1997.

(To be concluded)

The writer is Professor of Applied Economics at the Indian Institute of Public Administration, New Delhi.