Farm loan waiver: How to nip it in the bud
Despite substantial increase in agriculture production and productivity levels over the years, farmers’ indebtedness has not changed significantly. According to the National Bank for Agriculture and Rural Development (Nabard) All India Rural Financial Inclusion Survey (Nafis) 2016-17, 52.5% of agricultural households were indebted.
Considerable efforts have been taken in channelising institutional credit to farmers and raising farm credit disbursement targets, with allocations increasing by Rs 1 lakh crore in every Union Budget over the past three years. But non-institutional credit still hovers around 40%, and the majority of small and marginal farmers rely on moneylenders.
The share of marginal and small agricultural households in total non-institutional borrowings is around 52.40%. Moreover, access to institutional borrowings increases as land size increases and vice versa. Since 2014, India has seen large-scale loan waivers as a populist device and a short-term tool addressing the plight of delinquent farmers.
Starting from waivers in Andhra Pradesh and Telangana of Rs 24,000 crore and Rs 17,000 crore, respectively in 2014, and in Tamil Nadu of Rs 6,095 crore in 2016, a wave of farm debt relief spread across states. In 2017-18, Maharashtra waived off Rs 34,000 crore of loans, Uttar Pradesh Rs 36,000 crore, Punjab Rs 10,000 crore and Karnataka Rs 8,000 crore. Most recently, the newly elected governments in Madhya Pradesh, Rajasthan and Chhattisgarh also started the process in December 2018.
In the run-up to the Lok Sabha polls, eight states have already announced waivers of amounts that add up to a massive Rs 1.9 trillion. Increasing episodes of loan waivers disrupt the credit cycle, leading to very high bad loan ratio that cripples the fiscal health.
Increased default of farm loans further reduces flow of credit to farmers, making them more reliant on informal sources. On an incremental basis, banks disbursed only 6.37% of total credit in FY2018 to agriculture, the lowest in a decade. So, lenders are not only wary of giving out farm loans, but they are also unable to keep a lid on delinquencies.
With loan waivers, capital investment takes a back seat, aggravating both demand and supply side constraints in the agriculture sector due to a likely fall in asset creation (irrigation, markets, power, etc) that is crucial for sustainability of the agriculture sector. The primary reason for this persistent distress is the inability of farmers to get remunerative prices, due to the prevailing disconnect with the value chain resulting from market asymmetry, and lackadaisical institutional and infrastructure support.
Greater focus is required on enhancing their loan repayment capacity via smooth supply and value chains, and better price realisations.
Two measures could be:
1)Institutional Strength: The most important constraint of Indian farmers is their small and uneconomical size of holdings. This can be overcome by encouraging the formation and working via farmer producer organisations (FPOs) that act as aggregators and help farmers overcome their unorganised nature.
Farmers continue to hold their produce both for the want of immediate cash requirements and the lack of access to quality storage. Hence, government spending in the creation of suitable storage capacities — either independently or in public-private partnership (PPP) model — will not only help farmers to store their produce, but also connect them to institutional finance through amuch more secure mechanism of warehouse receipt finance through FPOs.
2)Better Decision-Making: The lack of availability of comprehensive information and advisory support to make farming decisions is a big hurdle. Agriculture and markets remain highly disconnected, with poor information flow across unusually long supply chains in most agricultural commodities. An independent national set-up could be created with a PPP at the block/district level to provide necessary information that would empower farmers to make the right decisions — from choice of crop and cropping practices, to harvesting and sales. This would augment input purchase support to small and marginal farmers, in line with direct cash transfer, as well as strengthen the efficacy of free market mechanism for ensuring remunerative prices.
It's time Government of India thinks of designing a procurement policy, with due consideration to region-specific crops for greater environmental sustainability and mainstream climate adaptation interventions in rural developmental programmes, rather than encourage loan waivers that only aggravate farm distress.
The writer is principal scientist, National Institute of Agricultural Economics and Policy Research, Indian Council of Agricultural Research, New Delhi