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    The past, present and future of farm loan waivers in India

    The past, present and future of farm loan waivers in India

    The past, present and future of farm loan waivers in India
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    By Amol Agrawal   | Tana Trivedi   IST (Updated)


    India needs to think of solutions to make the agriculture sector and its keepers more prosperous over a long-term.

    In 1931, the Indian Central Banking Enquiry Committee Report (chair: sir Bhupendra Nath Mitra), remarked: “In all parts of India the cultivator is steeped in indebtedness.  His credit needs are satisfied, if at all, inadequately and at ruinous prices. The nature of the interest In the land he cultivates varies from ownership to mere tenancy at will, and the efficiency of agriculture over large parts of the country is in consequence adversely affected by his possessing a restricted and precarious right in the land he cultivates, thus giving him no Incentive to improve the land.”
    Fast forward to nearly eighty years later, another committee (chair: R Radhakrishna) in 2007 said: "Though there are a number of factors behind the present agrarian crisis, it is the growing indebtedness that compels attention. It is declining earnings that results in the inability to repay the debt that triggers farmers’ decision to commit suicide. Hence, indebtedness of farmers becomes a central issue to be addressed.”
    It is interesting how little things changed in agricultural economics despite eight decades. One could just juxtapose the two reports and see very little which has changed in terms of farmer’s plights and their finances.
    Though, it is not as if nothing has changed on the agricultural front. The 2007 committee report documents that the share of agriculture in India’s GDP was 41 percent and share of the agricultural workforce was 74 percent. Currently, the contribution of the agriculture to GDP is 15 percent and the workforce is at 50 percent.
    Despite the decline, the institutional credit has expanded rapidly. Former RBI Urjit Patel in a 2017 speech said that outstanding bank advances to agriculture and allied activities have risen from about 13 percent of agricultural GDP in 2000-01 to around 53 percent in 2016-17.
    In real terms (adjusted for inflation measured by the GDP deflator), the growth of bank credit to agriculture and allied activities accelerated from 2.6 percent in the 1990s to 15.4 percent during 2000-01 to 2016-17. The sharp drop in agricultural production coupled with the sharp rise in agricultural credit clearly conveys the plight of this sector.
    The inability to find a long-term solution has led to short-term solutions such as loan waivers. The history of loan waivers also goes a long way. One of the first instances of loan waiver comes from the State of Bhavnagar in early 20th century.
    The credit for this goes to the Maharaja Bhavsinghji and his prime minister Prabhashankar Patni. The Maharaja believed that for the progress of the state it was necessary for the farmers to be free of debt, and that the state would be responsible for ensuring it.
    As per the scheme designed by Patni, the state paid out of its treasury Rs 20,59,000 and wrote-off Rs 33 lakh of land revenue arrears. The scheme was implemented with the help of the gram panchayats, and the money for the scheme was transferred to the village improvement fund, so as to eliminate the presence of money lenders.
    Patni’s debt redemption scheme, through applied only to a small state, was considered so successful that several British provinces inquired about it and implemented it. Though, the records are scanty on which provinces.
    One would imagine that loan waivers must have been done in the past, but the first loan waiver by the central government was done in 1990. Madhu Dandvate, the then finance minister, in his budget speech (March 19, 1990) announced:
    “Over the years, poor farmers, artisans and weavers have accumulated debt which they are unable to repay. They have been caught up in a vicious circle of indebtedness and low incomes which keeps them in perennial poverty. In order to relieve our farmers from the burden of debt, an assurance was given in the National Front’s manifesto that relief will be provided to farmers with loans upto Rs 10,000 as on October 2, 1989. I am glad to inform the House that we are now ‘ready with the scheme of implementation of debt relief to fulfil the promise, and redeem the pledge given to the kisans and artisans.”
    Under the scheme, the government decided to pay-off the loans held by the farmers. The minister further suggested if state governments also planned to introduce a similar scheme, the centre will support them.
    RBI’s 4th history volume (1981-97) reveals that debt relief of Rs 7,819 crore was provided under the scheme of which public sector commercial banks provided Rs 2,833 crore, the RRBs Rs 793 crore and the co-operatives Rs 4,193 crore. The Reserve Bank provided loans of Rs 1,956 crore through Nabard (National Bank for Agriculture and Rural Development) to the state governments to meet their share in the waiver by cooperatives.
    The next debt waiver was announced 18 years later by the then finance minister P Chidambaram in his budget speech (February 29, 2008):
    “….the question that still looms large is what we should do about the indebtedness of farmers. Honourable members will recall that government had appointed a committee under Dr R Radhakrishna to examine all aspects of agricultural indebtedness. The committee has since submitted its report and it is in the public domain. The committee had made a number of recommendations but stopped short of recommending waiver of agricultural loans. However, government is conscious of the dimensions of the problem and is sensitive to the difficulties of the farming community, especially the small and marginal farmers. Having carefully weighed the pros and cons of debt waiver and having taken into account the resource position, I place before this House a scheme of debt waiver and debt relief for farmers...”
    In the 1990 waiver, there was a blanket relief to all farmers up to Rs 10,000, whereas the 2008 scheme waived debt for certain classes of cultivators. There was a complete waiver for marginal farmers (i.e., those who were holding upto 1 hectare of land) and small farmers (1-2 hectare) whereas for others, there was a one-time settlement (OTS) scheme for all loans that were overdue on December 31, 2007, and which remained unpaid until February 29, 2008.
    The 2008 scheme cost the exchequer Rs 52,516 crore. Unlike the 1990 scheme, there is a fair bit of research on the effectiveness of the 2008 scheme.
    A recent RBI research paper by academicians Deepa S Raj and Edwin Prabu A sum up the findings of several researches as “mixed”. The distressed borrowers gain but there is little impact on future investment and productivity of beneficiary households.
    Moreover, there appears to be no evidence of improvement in the ex-post repayment behaviour of the waiver beneficiaries and has actually led to a rise in moral hazard with farmers expecting loan waivers around election cycle.
    On the credit supply side, banks shifted lending to areas where the exposure to waivers was high which increased bank efficiency but also restricted lending to backward districts and could lead farmers to factor in future credit constraints and hence shift to informal sources of credit.
    The authors have done a survey on loan waiver in Tamil Nadu in 2016 which shows that “probability of obtaining credit was higher for non-beneficiary farmers than for beneficiary farmers” but this benefit declines as credit supply normalises.
    Pronab Sen, former chairman of the National Statistical Commission, in a recent article, cited Urjit’s views on the waiver. In a press conference on April 2017, Patel said:
    “I think it (farm loan waiver) undermines an honest credit culture, it impacts credit discipline, it blunts incentives for future borrowers to repay, in other words, waivers engender moral hazard. It also entails at the end of the day transfer from tax payers to borrowers. If on account of this, overall government borrowing goes up, yields on government bonds also are impacted.”
    However, Sen dubs these views as elitist. He says unlike previous loan waivers which were driven by drought, the recent loan waivers are mainly due to demonetisation in which governor and the government were complicit.
    He also says that the centre is concerned with the banks, the states are concerned with the farmers. Thus, there is a need for a “better farm loan model which protects both the farmers and the banks without bringing politics. Until such time, farm loan waivers need to be viewed less ideologically and with more compassion.”
    To sum up, India has a long history of farm distress, indebtedness and loan waivers. Right from Patni to Jaitley, the ministers-in-charge have been put under pressure to find a solution for the multi-fold and interconnected problems brought due to vicissitudes in the agriculture sector.
    Loan waiver can help tide over the immediate anger and crisis. But we clearly need to think of solutions to make the sector and its keepers more prosperous over a long-term.
    Amol Agrawal and Tana Trivedi are faculties at Ahmedabad University.
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