The seeds of loan waiver sown by Prime Minister Narendra Modi, in the form of a promise made during the UP assembly elections, have now turned into a full-grown tree spreading its roots across states. What began with the UP government’s announcement in April, followed by Maharashtra, yet another BJP-ruled state, has now been emulated by Punjab and Karnataka where the Congress is in power. The loan waiver amounts vary from Rs 50,000 in Karnataka to Rs one lakh each in UP and Maharashtra, and up to Rs 2 lakh in Punjab. While the UP and Punjab schemes target those with less than five acres holding, the Karnataka and Maharashtra waivers seem to extend to all farmers, albeit restricted only to loans taken from cooperative banks. Either way, given the sheer number of potential beneficiaries, the fiscal costs — for the four states alone, the currently estimated burden is over Rs 85,000 crore — are going to be huge. And these will only mount, as the fever spreads and more states join the bandwagon.
It’s true that the farming community has gone through a harrowing time, whether due to adverse weather events in 2014-15 and 2015-16 or the more recent price crash across agri-commodities following demonetisation. If at all there is anybody deserving of special support today, it is certainly farmers. Putting the rural economy back on the rails is, moreover, in everybody’s interest. But are loan waivers the right way to go about that? To the extent that they impose fiscal costs, these schemes also entail diversion of public resources that could have gone to build rural roads, hospitals, schools and irrigation works. Empirical evidence also suggests that weakened credit discipline from repeated waivers creates disincentives for further lending by banks. The ultimate sufferers from both — less public investment in rural infrastructure and reduced agricultural lending — would be farmers themselves.
A loan write-off would be worth it if it specifically targets farmers who have fallen out of the institutional credit system. These farmers, and also those who have always been dependent on borrowing from local moneylenders and traders, have every right to be able to access formal finance that makes them more productive. But farmers would be better helped if they are allowed to realise remunerative prices for their produce. Why is the Modi government still persisting with restrictions on stockholding, domestic movement and export of pulses, edible oils or sugar — when none of these exist for steel or software? There is also a case for reviewing import duties on most agricultural commodities; currently, these are way below the rates that India has “bound” with the World Trade Organisation. Better price realisations, not blanket waivers, is what farmers really require today.