It’s raining loan waivers

Farm loan waivers have a long history in India, and they have mostly been used as a tool by governments to temporarily address the problem of farmer distress. Presently, farmers have been affected by a rapid fall in the prices of farm goods after a year of bumper production. This has forced them to default on the loans they borrowed from banks. State governments, given the high costs involved, have been unable to procure the produce of farmers at remunerative prices. So they have resorted instead to loan waivers that cost less money.

How widespread is the phenomenon?

The present spree of farm loan waivers gained national attention in April this year after the Uttar Pradesh government waived farm loans worth over ₹36,000 crore. State governments in Tamil Nadu, Maharashtra, and Punjab have also extended similar waivers to their farmers, and this has now led to fears that farmers in other States too could begin asking for waivers.

What is the impact of loan waivers?

Loan waivers impose a significant cost on the budgets of State governments since banks will have to be compensated by the governments for the losses they incur. Further, the offer to waive off loans could end up increasing the cost to governments by encouraging wilful default by farmers who can actually afford to pay off their loans. Loan waivers also lead to the problem of moral hazard. Farmers, when they know that the government will waive off their loans when things go wrong, are more likely to make poor investments or take higher risks. Some, like former RBI governor Raghuram Rajan, have argued that loan waivers are only the symptom of an underlying problem. The real problem, they argue, may be populist lending that has pushed Indian farmers into a debt trap.

Why do some governments take recourse to waivers as a necessary solution?

Farmers are a powerful vote bank for many major political parties, so State governments have had to budge to their demands. Maharashtra, for instance, faced a shutdown that affected the supply of essential supplies like milk and vegetables. Chief Minister Devendra Fadnavis soon gave in and announced the waiver of loans worth over ₹34,000 crore and other benefits.

What could be an alternative solution to the agrarian crisis?

Indian agriculture faces a secular crisis due to the risks involved in agriculture, and the lack of sufficient returns. Many economists have argued that this cannot be solved through temporary populist measures, but instead requires structural reforms. Such reforms can help improve farmer incomes and also encourage farmers to seek their livelihood in more profitable sectors of the economy.