S. Sivadas 
S. Sivadas 

Loan waiver is no magic wand

S. Sivadas

S. Sivadas

After the hectic election campaign for five states that was considered a dress rehearsal for the coming Lok  Sabha polls six months hence, where the issues ranged from temple entry for women to the Rafales fighter jet deal with France, to a host of minor issues, the acrimonious roadshow boiled down to the main issue, that is the rampant rural distress. Whatever shape these had assumed, whether it be the Patidar agitation for reservations in Gujarat, or the Marathas long march across the arid Maharashtra landscape for quotas, or the separate status for the Lingayat community in Karnataka, at the root of all these was the total neglect of the farm sector by successive dispensations in favour of development and urban modernisation.

It was not surprising that as the elections approached, the issues began to crystallise, and the political parties realised that the basic cause of all this discontent was the agrarian crisis that had been in the making for some time. That was why as soon as the new governments took over they were in such a hurry to pacify the farmers by waiving the loans that had been one of their long standing demands.

Even earlier the Prime Minister had announced the maximum support price (MSP) f or farm produce, another long-standing demand of the farmers, to win over this segment of the voters and pass on the message that his party was not anti-farmer or favoured only the big business and the urban segment, as was the general perception. These had been done without examining the consequences they would have on the economy or the overall effect.

Predictably, the Niti Aayog, the new think tank of planners, was quick to speak up against the loan waiver and caution that such populist steps would help only a section of the farming community and does not mitigate the larger agrarian distress. ‘It is not a solution, it is a just a palliative,’ it’s Vice Chairman, Rajiv Kumar said pointedly. Another member of NITI Aayog, an expert on agriculture, Ramesh Chand, went on  to explain that the waiver’s biggest problem was that it would benefit only a minuscule section of the farming community and in poor states, it would benefit only 15 per cent of farmers as only these get institutional loans. And in many states only 25 per cent avail of this facility. ‘When you have this kind of variations in terms of access to institutional credit, it is not worth spending so much money on farm loan waivers. Even the CAG report says loan waivers do not help to address distress in the farm sector.’ This point of view was also echoed by economist Arvind Panagariya, a former Niti Aayog member.

Anyway, elated over the election victory in the states, the Congress chief Rahul Gandhi was quick to seize the moment to promise similar sop to farmers across the country if his party was returned to power. In the same breath he also made another promise, that of giving sleepless nights for the prime minister if his government did not address farmers’ issues. ‘The united opposition would exert such pressure on Modi that not a single farmer would be left out,’ he threw a challenge.

Agrarian distress, it seems, has only just now dawned upon urban consciousness. The anger of the tillers of the soil, slow to respond, has now started to influence political parties to take notice of them. But the irony cannot escape notice. In the same breath Kamal Nath, the MP Chief Minister announced the loan waiver he also dwelt on the migrant labour from neighbouring states that is depriving their people of livelihood by taking away their jobs. The migrants are precisely those who have been displaced by farm distress in their own states. In fact the entire migration, within the country and abroad, has been due to this farm distress in the form of drought or natural calamities or alterations made in the cropping pattern or the development  schemes. From the plantation labour that migrated to Ceylon and Malaya to the sugarcane labour in distant West Indies, these distressed farmers have travelled quite far and wide over the centuries.

Modi had indeed announced such measures earlier. Before the UP elections the states that were leading in loan waivers were UP, Karnataka, Maharashtra, Punjab and Rajasthan. Besides being ineffective, this step also deflects the issue rather than solve the problem and there is also another dimension, a moral one that is of rewarding the defaulters. This is at best a token of atonement by the political parties for having failed in providing the proper infrastructure and remunerative prices for their produce, because even a bumper crop only adds to their misery, with a collapse of prices and financial disaster. There is then the cascading effect, of using the taxpayers’ money to bail out banks that had provided these dead loans.

This was also one of the measures suggested by the former RBI chief Raghuram Rajan, for reviving the economy, a discontinuation of these loans and putting the affairs of the public sector banks in order, and taking them out of the non-performing assets (NPA) category.

So far in 2017-18, ten states had announced farm loan waivers amounting to nearly Rs 1.7 lakh crore, according to data, but the final amount of loans waived often differs from initial estimates based on their actual implementation.

While, so far individual states had taken the initiative, demands for a nationwide waiver are also rising. The last time such a nation-wide waiver was announced was in 2008, when the Congress-led government waived Rs 52,260 crore. According to RBI data, as of October 26, 2018, the outstanding credit to agriculture and allied services stood at Rs 10.6 lakh crore and as such, the state loan waivers announced so far account for about 16 percent of the outstanding loans.

If a nationwide loan waiver scheme were announced, it would only add to the proportion of loans waived. Such schemes don’t exempt all existing dues but are usually designed in a way to waive loan accounts up to a certain amount.

Usually when a loan waiver is announced, at first, banks see a fall in bad loans in their agricultural lending portfolio as the government makes good on overdue loans.

However, it is the second order impact of waivers which is more damaging. In anticipation of loan waivers continuing, borrowers are often seen defaulting on repayment even if they have the ability to pay back.

A study had noted that bad loans in the State Bank of India’s agriculture loan portfolio have shot up after past loan waivers and its agriculture bad loans risen from 6.4 percent before UP announced its loan waiver to 11.4 percent.

The SBI’s non performing loans (NPL)) have been rising steadily over the years post these waivers. The NPLs rose sharply after the 2008 nationwide waiver and after the UP and Maharashtra governments announced waivers.

The RBI has also cautioned against loan waivers time and again. In a research paper in September 2017, it had noted that such waivers are essentially a transfer from tax payers to borrowers and these can also have a long lasting impact on state finances by pushing up borrowings and borrowing costs. ‘If overall government borrowing increases, yields on state development loans may firm up posing higher interest burden for the states in future,’ the study noted.

Together Rajasthan, Madhya Pradesh and Chhattisgarh have now announced loan waver that would cost the exchequer Rs. 18,000 crore. Earlier the UP and Maharashtra governments had announced waivers of Rs. 36,360 crore and Rs. 30,500 crores respectively.

The case of Punjab where the waiver scheme has come a cropper is one example of how election promises can go awfully wrong. In its manifesto for 2017 elections the state government promised complete waiver of farm loans of about Rs. 67,000 crores and negotiate with the banks. The Chief Minister, Captain Amrinder Singh, had then declared his government would waive the debt of every farmer and negotiate with the banks to attain this objective.

However, so far they had been able to waive only Rs, 1,750 crores from the cooperative banks and it would launch its second waiver covering Rs. 1,770 crores  from commercial banks. This has resulted in small and marginal farmers having to wait their turn. Punjab got into this logjam because its outstanding liabilities had run up to Rs. 196, 040 crore and the state’s borrowing capacity had been stretched to its limits to finance any meaningful waivers. This is more or less the case with most states.

This is also one reason NITI Aayog has been opposing farm loan waivers, said its agriculture expert, Ramesh Chand. ‘If you look at the percentage of farmers who have any outstanding loans from institutional sources, it is not even 50 per cent. So you are spending lakhs and crores and not even half the farmers are benefitting. In some cases not even 25 per cent of farmers are availing of the credit. It is necessary that attention is paid to the equity aspects also.’

According to one Aayog study not all farm loans are taken for agricultural purposes and in some states these crop loans are used for consumption purposes.

In Rajasthan loans owed to banks will be waived up to Rs, 2 lakhs in the case of ‘distressed farmers’ who have defaulted in making payments. Here also, as in Punjab, the debt-GSDP ratio is quite high at 33 per cent to permit ambitious waivers.

Election rhetoric does not take into account these factors and honouring the commitments made has become a problem when the auditors arrive and point out the mismatch. The recent problems that the government had with the RBI are basically due to negotiating through the promises and hard realities and finding a way out. That is what democracy is all about and these contending pulls and pressures need to be resolved through dialogue. Right from the beginning of independence the one sector that had been neglected has been agriculture, which is the mainstay of the economy and livelihood of a majority of the people. As in China and Russia the farmers have been the backbone of the country’s stability and this can be altered only at a terrible cost.

- S Sivadas, Senior Journalist.

(The views expressed in the article are those of the author).