Crop Loan Waiver, Farmers' Welfare and their Future Income

Crop Loan Waiver, Farmers' Welfare and their Future Income

By:

Vijay Sardana

International Agriculture Tarde & Policy Expert

Email: sardana.vijay@gmail.com

Blog: Vijay Sardana Online

BJP Uttar Pradesh Election Manifesto promised crop loan waiver for the farmers and zero interest on crop loans for small and marginal farmers. In the first cabinet meeting this demand was partially adopted by the new government.

The basic question remained unanswered, why farmers of India are not able to ensure livelihood from their own land. This must be addressed in we want to ensure social and political stability in the country.

Are loan waiver answer to problems of the farmers?

The first major loan waiver happened in the year 2008 when UPL one planning for national elections. In 2009. In 2008, similar scheme was launched with Rs. 60,000 crore package, offered to nearly 3 crore farmers. Marginal farmers – with cultivation land less than 1 hectare, and small farmers – with cultivation land between 1 and 2.5 hectares, were given a complete waiver on loans disbursed up to March 31, 2007, which were overdue as of December 2007, and unpaid as of February 29, 2008. Other farmers – with cultivation land over 2.5 hectares, had 25% of their loan waived as long as they paid back the 75% of the loan (25% or Rs. 20,000 of the loan, which ever was higher) (AGRICULTURAL DEBT WAIVER AND DEBT RELIEF SCHEME (RBI), 2008).  The scheme was introduced to alleviate the miseries farmers and address farmer suicides. Now, in 2017 again in crucial assembly election of Uttar Pradesh, the ruling Party at Center promised loan waiver and bot the political dividend in the form of majority seats in UP state. Soon after the election victory loan waiver was announced. It seems that political parties have identified a simple formula of inducement to win elections. Like free laptops, free food, free water, free electricity, free education, free healthcare and now loan waiver and interest free loans will become the start part of all election manifestos. If you analyze carefully, these loan waivers are not addressing the causes of the farmers’ miseries and farmers’ problems. Unfortunately, election manifestos are not even addressing the factors responsible for miseries of the farmers.

Why loan waivers will break the confidence of private lenders towards agriculture and rural economy?

Bank credit in developing countries typically expands faster than national gross domestic product (GDP) as demand expands and financial deepening occurs. India is also not exception. Since 1991 after economic liberalization, India’s overall GDP has grown faster than the agriculture growth over the past over two decades’. This drives and forces bank agriculture lending to grow much faster than underlying agriculture GDP, making targets for the bankers harder to meet.

In India, in last many years, lending to agriculture has settled at about 36% of agricultural GDP. It is difficult to say what is a good credit/GDP ratio for agriculture in the long run because the farm economics in India is in bad shape. On one hand India needs further financial deepening and financial inclusion, especially in rural areas and on the other sectors such as utilities have higher ratios, though they tend to be more capital intensive.

Political parties and ruling government force banks to extend credit to farmers without extending education and quality inputs for farming. This is a real crisis for the banks and financial institutions.

In the short-run, forcing agricultural lending by banks to follow overall lending targets is unequivocally unhealthy, for both banks and farmers. This forces credit surges unrelated to the sector’s needs. This was most clearly seen when the economy was running above 9% growth rates and overall credit was expanding rapidly. Banks had no choice but to nearly triple their lending for every unit of agricultural output. Due to political compulsions, even with banks and borrowers pushing the boundaries of qualifiable lending and fact was the stagnant agricultural sector did not have the capacity to absorb such large volumes of cash. This is a classic case of throwing good money, after bad cause and over-indebted farmers became a national concern. On top of many tragedies, over-indebtedness pushed the farm loan waiver programme, which dealt a lasting blow to the loan repayment culture of farmers. As far back as 1998, the M. Narasimham Committee noted that 44% of non-performing loans (NPLs) originated from Priority sector lending. In 2010-11 that figure was a staggering 73%. This is not a concern for political parties because for them winning elections at the cost of national development is a primary concern. Farmers, as voters, are also comfortable with such loan waiver scheme.

Why loan waivers are not the answer to farmers’ miseries?

Unless there is an attempt to make agriculture profitable for the farmers, such loan waivers will become standard policy tool for the ruling parties and inefficiencies will further increase in agriculture sector. This will complicate the problem further.

Food demand will continue to rise in India and with stagnant productivity, the demand for imported food will go up and Indian farmers will further suffer due to competition from crops from world market.

Estimated food requirements of India by 2030 calculated by author are given in the table below:

Demand projections by author based on various recommended consumption parameters (in million tons)
Category	In 2015 (Estimated.)	By 2030 (Projected)	Required Growth in production per year (in Million tons)
Pulses	17.2	40.0	1.52
Coarse Cereals	41.7	102.0	4.02
Wheat	88.9	95.0	0.41
Rice	104.8	156.0	3.41
Oilseeds	26.7	70.0	2.89
Milk	146.3	182.0	2.38
Fish	10.1	16.0	0.39
Egg	39.2	57.0	1.19
Meat	6.0	15.0	0.60
Fruits	86.0	110.0	1.60
Vegetables	167.0	180.0	0.87
Tea	0.9	1.1	0.01
Sugar	25.0	33.0	0.53
Total food Demand	759.8	1057.1	19.82
Please note: Demand for many other items which make part of food system is yet to be estimated. Source: The POLITIECONOMY, Int’l Research Journal of Political Economy, Volume 3, Issue 1, September 2016, Page 135

The challenges which government must address are:

1.     Problem in poor farm productivity and loan waivers does not improve productivity - Evidence from NSSO suggests that nearly 40% of the crop loan amount taken in the name of agriculture is used on non-agriculture purposes such as marriages, education, health, etc. Unfortunately, there is no effort to provide quality inputs and education to farmers’ and no focus on extension education. In case of loan waiver, it will be more sensible and logical to use the same money for providing good quality seeds and other inputs. This will not only improve the productivity but will also reduce the cost of production for the farmers. They will not be in debt trap. These targeted inputs based subsidies for specific inputs such as seeds, fertilizers can be based on specific regional needs. This can be better method of utilizing national resources than loan waiver. This may not be as attractive as loan waiver, for political parties, which is a political inducement during election times.

2.     Credit alone is not enough to address farmers’ livelihood challenges – Series of surveys and data indicates such inducements never hep agriculture sector per say. Food grains growth fell from 2.85 per cent in the 1980s (1980-81 to 1990-91) to 1.16 percent in the 1990s (1990-91 to 2003-04), which was lower than the rate of growth of population of 1.9 per cent during this period. While the Indian economy itself may have shifted to a more service based economy and away from agriculture, the agricultural sector has benefited little from technological advancements. There was no attempt to improve the agriculture productivity by proper planning and technology transfer. There has been little or no improvement in agricultural infrastructure such as irrigation systems, storage systems, market linkages, etc. The wide spread corruption in Indian politics and administration has complicated the situation further.

3.     Loan waivers complicate situation for banks - The scheme does not help the banks either, because they forced to lend to both viable and unviable clients using the same lending parameters. In addition, banks have to write off bad loans, which are expensive not only for the banks, but also the government and ultimately additional burden on tax payers. It is estimated that in 2010-2011, nearly 73% of Priority Sector Lending resulted in bad loans, and nearly 44% of these loans were in the agricultural sector. In last 7 years, there is no attempt to reform agriculture marketing system, storage infrastructure and agriculture extension education system.  There are no visible actions on ground to improve farmers’ conditions.

4.     Informal lending from money landers remain unaddressed – In most villages, there are no banking facilities. Most farmers take loans either from the bank or the moneylenders for agricultural purposes. This scheme does not address loans taken from informal sources. In addition, there were farmers who took on expensive loans from the informal sector like money lenders to pay off their agricultural debt in last few years. They are not rewarded under this scheme. These schemes will force these farmers to think twice for returning loans to banks in future. Is this healthy sign for rural development? In fact, we are disturbing national character towards honesty.

5.     Wrong classification of credit need in Indian rural conditions - Classification of marginal, small and other farmers is inadequate and sometimes faulty because there is no relation between land holding and productivity.  The size of the land might not be a robust indicator of credit worthiness or credit need. Poor soil and land management has direct linkage with poor productivity. Credit worthiness should not depend upon land based criteria.

6.     Lack of credible monitoring and evaluation - The scheme requires the lending institutions (commercial and public) to appoint a Grievance Redressal Officer in each State.  However, it is unclear how RBI wanted to monitor the loan usage and grievance issues. Also, there was insufficient monitoring and evaluation to determine whether the scheme worked or not. Lack of reach and lack of proper scientific methods of crop management makes life complicated for assessing officers. Mandatory priority lending targets for banks also force them to ignore this requirement.

Will Loan waiver help farmers livelihood?

The answer is No. This money will not go to farmers but to the banks.

The problem of farmers is productivity and proper price realization of their crops. These schemes have no impact on agricultural productivity and well-being of the farmers. Loan waiver is “curing the symptoms, and not the disease”, it means farmers situation has not improved. He is still in the same mess and will be pushed back in debt trap soon than later.

The way forward:

1.     Ministry of Agriculture with the help of state administration must develop a district wise action plan to ensure profitable agriculture production cycle. This will help in ensuring proper seed, irrigation and other inputs supply. This will also help in developing proper marketing system. If the proposed production cycle is not profitable do not force farers into debt tarp but force agriculture research system to respond to the ground level challenges. This can be done by making agriculture universities accountable for their performance of crop in their catchment area. If banks have lending targets in the region, why agriculture universities do not have performance target in the same region.

2.     There is a need to better understand the credit needs of the agricultural sector, and specifically the credit needs of the farmers based on the region and weather patterns, and their risk appetite.  The investment required to minimize the risk is not happening. The biggest risk is poor price realization after bumper crop. Poor infrastructure and poor market linkages is the biggest concern. There is no accountability of any department to ensure this. In fact, there are laws, rules and departments like APMC to prevent efficient marketing and efficient linkages of farmers with market forces. 

3.     A more holistic approach to lending is needed of the farmers in place of forcing banks to push loans under Priority lending schemes. With better technologies, this approach can be changed with effective monitoring of activities on farms. There also needs to be more emphasis on markets linkages, weather and crop insurance must ensure income support as well, and a greater application of technological innovations in agriculture productivity and price forecasting.

4.     Benchmark India research system with bets in the world to make them accountable to tax payers. Government must also create incentive for private sector participation in agriculture research education. Today, ICAR is the only monopoly in the system and there is no incentive for private research in agriculture due to various procedural hurdles. There must be accountability for agriculture research system in India to address current challenges of agriculture and allied activities.

5.     Mindset towards private sector must change. Agriculture sector is too vast to be managed by public sector alone. The diversity and complexity of agriculture sector needs state of the art knowledge base, skills and technology. This cannot be done as routine office job. Unfortunately, most of the farmer leaders are still in the communist era and expect government may provide answer to all problems. Government departments do not want private sector to play key role because their will expose their weaknesses and working inefficiencies. They all expect markets to perform better when it comes to price realization but they don’t want private sector to invest in related activities based on prudent financial criteria based on returns on investments. Very often policy makers assume they have all information and this lack of understanding of changing reality is creating big divide between policy making and ground reality. Political patronage due to vote bank politics hurting development and shaking confidence of investors and investment is not taking place. There is no focus on institution building in the country because political leaders do not want to delegate their powers. There is no consistency in policies between various levels of administration and between various political ideologies because Individuals take priority of institution and facts are ignored.  No private investor is keen to invest in agriculture research in big way in India due to political risk based on illogical perceptions towards private sector, which can easily be addressed with proper regulatory framework.

Unless we change our mindset towards agriculture and focus on institution building these loan waivers will be integral part of every election manifesto. Can Modi Government promise there will be no more loan waiver in India because their policies will deliver as promised and farmers will have sufficient income for dignified life. Time will tell the difference between promise and performance.