Loan Waiver Scheme: Analysis

Indian agriculture is characterised by low scale and low productivity.

About 85% of the operational landholdings in the country are below 5 acres and 67% farm households survive on an average landholding of one acre.

More than 50% of area under cultivation does not have access to irrigation.

Agriculture income generated is not adequate to meet farmers’ needs.

Free power and farm loan waivers cannot be a permanent solution to the problems in the agriculture sector : Vice-President Venkaiah Naidu

“We have a clamour for populism to win over people during elections. That is not going to solve the problem.”

The share of institutional loans disbursed to agriculture and allied sectors has risen from 9% in 2000-01 to 31.4% in 2015-16.

The amount of short-term institutional loans for agriculture exceeds the total cost of inputs including hired labour. This indicates that a part of crop loans is spent on non-agricultural purposes.

According to NSS surveys on Investment and Debt (NSS-I&D), loans taken by cultivators from non-institutional sources is rising faster than from institutional sources.

Much of the growth in household demand in rural India has been debt-ridden and not supported by growth in income.

Modern agriculture requires investment in farm machinery and inputs like seed, fertiliser, agri-chemicals, diesel and hired labour.

Savings generated from unremunerative crop enterprise are inadequate for such investments.

Rising expenses on health, education, social ceremonies and non-food items put additional financial demand on farm families.

States like Uttar Pradesh, Maharashtra, Punjab and Karnataka have rolled out farm loan waiver schemes for immediate relief to farmers.

The demand for such measures is spreading to other States too.

Ultimate goal is to lessen the debt burden of distressed and vulnerable farmers and help them qualify for fresh loans.

The success of the loan waiver lies on the extent to which the benefits reach the needy farmers.

It covers only a tiny fraction of farmers. According to 2012-13 NSS-SAS, 48% of the agricultural households did not have any outstanding loan.

Out of the indebted agricultural households, about 39% borrowed only from non-institutional sources.

The farmers investing from their own savings and borrowing from non-institutional sources are equally vulnerable, but are outside the purview of loan waiver.

Provides only a partial relief because half of the institutional borrowing of a cultivator is for non-farm purposes.

Many household has multiple loans either from different sources or in the name of different family members, which entitles it to multiple loan waiving.

Loan waiving excludes agricultural labourers who are weaker than cultivators in bearing the economic distress.

It severely erodes the credit culture, with dire long-run consequences to the banking business.

Scheme is prone to serious exclusion and inclusion errors, as evidenced by the Comptroller and Auditor General’s findings in the Agricultural Debt Waiver and Debt Relief Scheme, 2008.

According to the CAG report, 13.46% of the accounts, eligible for the benefits under the scheme were not considered by the lending institutes while preparing the list of eligible farmers.

In 8.5% of the cases, the beneficiaries were not eligible for either debt waiver or debt relief but were granted the benefits.

Around 28% of the beneficiaries were not issued debt relief certificates which would have entitled them to fresh loans.

Implications for other developmental expenditure, having a much larger multiplier effect on the economy.

A similar amount spent on improvement of agriculture infrastructure and other developmental activities would create a base for future growth and development of the sector.

Loan waiving can provide a short-term relief to a limited section of farmers;

It has a meagre chance of bringing farmers out of the vicious cycle of indebtedness.

There is no concrete evidence on reduction in agrarian distress following the first spell of all-India farm loan waiver in 2008.

More inclusive alternative approach is to identify the vulnerable farmers based on certain criteria and give an equal amount as financial relief to the vulnerable and distressed families.

Raise income from agricultural activities and enhance access to non-farm sources of income

Strengthen the repayment capacity of the farmers by improving and stabilising their income.

Improved technology, expansion of irrigation coverage, and crop diversification towards high-value crops are appropriate measures for raising productivity and farmers’ income.

Another major source of increase in farmers’ income is remunerative prices for farm produce.

More public funding and support

Removal of old regulations and restrictions on agriculture to enable creation of a liberalised environment for investment, trading and marketing.

States must undertake and sincerely implement long-pending reforms in the agriculture sector with urgency.