Loan waiver is not the solution

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We need to revisit the credit policy with a focus on the outreach of banks and financial inclusion

Since Independence, one of the primary objectives of India’s agricultural policy has been to improve farmers’ access to institutional credit and reduce their dependence on informal credit. As informal sources of credit are mostly usurious, the government has improved the flow of adequate credit through the nationalisation of commercial banks, and the establishment of Regional Rural Banks and the National Bank for Agriculture and Rural Development. It has also launched various farm credit programmes over the years such as the Kisan Credit Card scheme in 1998, the Agricultural Debt Waiver and Debt Relief Scheme in 2008, the Interest Subvention Scheme in 2010-11, and the Pradhan Mantri Jan-Dhan Yojana in 2014.

It is encouraging to see a robust increase in institutional credit from Rs. 8 lakh crore in 2014-15 to Rs. 10 lakh crore in 2017-18. Of this, Rs. 3.15 lakh crore is meant for capital investment, while the remaining is for crop loans, according to the Ministry of Agriculture and Farmers Welfare. Actual credit flow has considerably exceeded the target. The result is that the share of institutional credit to agricultural gross domestic product has increased from 10% in 1999-2000 to nearly 41% in 2015-16.

Clamour for loan waiver

While the flow of institutional farm credit has gone up, the rolling out of the farm waiver scheme in recent months may slow down its pace and pose a challenge to increasing agricultural growth. The Uttar Pradesh government has promised a Rs. 0.36 lakh crore loan waiver covering 87 lakh farmers, whereas the Maharashtra government has announced it’s writing off Rs. 0.34 lakh crore covering more than 89 lakh farmers. The demand for a loan waiver is escalating in Punjab, Karnataka, and other States. This clamour is only poised to increase as the 2019 general election comes closer.

There is a serious debate on whether providing loans to farmers at a subsidised rate of interest or their waiver would accelerate farmers’ welfare. At the global level, studies indicate that access to formal credit contributes to an increase in agricultural productivity and household income. However, such links have not been well documented in India, where emotional perceptions dominate the political decision quite often. A recent study by the International Food Policy Research Institute reveals that at the national level, 48% of agricultural households do not avail a loan from any source. Among the borrowing households, 36% take credit from informal sources, especially from moneylenders who charge exorbitant rates of interest in the 25%-70% range per annum. More importantly, the study using the 2012-13 National Sample Survey-Situation Assessment Survey (schedule 33) finds that compared to non-institutional borrowers, institutional borrowers earn a much higher return from farming (17%). The net return from farming of formal borrowers is estimated at Rs. 43,740/ha, which is significantly greater than that of informal sector borrowers at Rs. 33,734/ha. Similarly, access to institutional credit is associated with higher per capita monthly consumption expenditures.

A negative relationship between the size of farm and per capita consumption expenditure (a proxy for income) further underscores the importance of formal credit in assisting marginal and poor farm households in reducing poverty. Indeed, access to formal institutional credit also tends to enhance farmers’ risk-bearing ability and may induce them to take up risky ventures and investments that could yield higher incomes. Going by the NSS schedule 18.2 (debt and investment), rural households’ investments in agriculture grew at a high rate of 9.15% per annum between 2002 and 2012. While 63.4% of agricultural investments are done through institutional credit, landless, marginal and small farmers’ investment demand is met through informal sources to the tune of 40.6%, 52.1%, and 30.8%, respectively. Statistics show that nearly 82% of all indebted farm households (384 lakh) possess less than two hectares of land compared to other land holders numbering 84 lakh households. Those residing in the less developed States are more vulnerable and hence remain debt ridden.

Not helping farmers’ welfare

Clearly, a major proportion of farmers remain outside the ambit of a policy of a subsidised rate of interest, and, for that matter, of loan waiver schemes announced by respective State governments. In other words, this sop provides relief to the relatively better off and lesser-in-number medium and large farmers without having much impact on their income and consumption. This anomaly can be rectified only if the credit market is expanded to include agricultural labourers, marginal and small land holders. It is, therefore, important to revisit the credit policy with a focus on the outreach of banks and financial inclusion.

Second, the government along with the farmers’ lobby should desist from clamouring for loan waivers as it provides instant temporary relief from debt but largely fails to contribute to farmers’ welfare in the long run. To what extent this relief measure can help bring farmers out of indebtedness and distress remains a question. This is because farmers’ loan requirement is for non-agricultural purposes as well, and often goes up at the time of calamity when the state offers minimal help. If governments are seriously willing to compensate farmers, they must direct sincere efforts to protect them from incessant natural disasters and price volatility through crop insurance and better marketing systems.

Third, it should be understood that writing off loans would not only put pressure on already constrained fiscal resources but also bring in the challenge of identifying eligible beneficiaries and distributing the amount.

The report of the Committee on Doubling of Farmers’ Income, Ministry of Agriculture and Farmers Welfare, has rightly suggested accelerating investments in agriculture research and technology, irrigation and rural energy, with a concerted focus in the less developed eastern and rain-fed States for faster increase in crop productivity and rural poverty reduction. Additional capital requirements estimated for 20 Indian States are Rs. 2.55 lakh crore (Rs. 1.9 lakh crore on irrigation and rural infrastructure by State governments and Rs. 0.645 lakh crore by the farmers) at 2015-16 prices by 2022-23. Public and private investments are required to grow at an annual rate of 14.8% and 10.9% in the next seven years. A diversion of money towards debt relief, which is in fact unproductive, will adversely impinge on state finances, may dissuade lending by the banks, and hence prove counterproductive to the government’s broader mandate of doubling farmers’ income by 2022-23.

Anjani Kumar and Seema Bathla are agricultural economists at IFPRI and Jawaharlal Nehru University, New Delhi, respectively. Views are personal.