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Farm Loan Waivers Good or Bad?

Farm Loan Waivers Good or Bad?

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GS 3 || Economy ||Agriculture ||Agricultural Credit

Why in news ? :

  • Three newly elected Indian state governments have waived up to $8.6 billion in farm loans.
  • Former Reserve Bank of India governor Raghuram Rajan has stressed on the need to do away with farm loan waivers citing “enormous” problems for state finances and investment. He also said that farm loan waiver should not form part of poll promises and he has written to Election Commission that such issues should be taken off the table.

What exactly is a farm loan waiver ?

  • The Central or the state government take the responsibility of the loans taken by farmers and pay them back to the banks.
  • Two type of farm loan waivers – Complete Waiver & Partial Waiver (Only certain part is paid back by government)

Background:

  • According to a 2017 report by the RBI, farm loan waiver amounting to Rs 88,000 crore likely to be released in 2017-18 by seven states, including Uttar Pradesh and Maharashtra, may push inflation on permanent basis by 0.2%.

The ever- rising demand:

  • Agriculture currently contributes just about 17% to the national output and about 49% of the population directly or indirectly depends on it for employment.
  • Farmer distress is a real and pressing problem, as evidenced by the protests currently taking place in various parts of the country. In the recent past, widespread demands have been heard for farm loan waivers amid continuing agrarian distress.

Issues with loan waivers:

  • It covers only a tiny fraction of farmers. The loan waiver as a concept excludes most of the farm households in dire need of relief and includes some who do not deserve such relief on economic grounds.
  • It provides only a partial relief to the indebted farmers as about half of the institutional borrowing of a cultivator is for non-farm purposes.
  • In many cases, one household has multiple loans either from different sources or in the name of different family members, which entitles it to multiple loan waiving.
  • Loan waiving excludes agricultural labourers who are even weaker than cultivators in bearing the consequences of economic distress.
  • It severely erodes the credit culture, with dire long-run consequences to the banking business.
  • The scheme is prone to serious exclusion and inclusion errors, as evidenced by the Comptroller and Auditor General’s (CAG) findings in the Agricultural Debt Waiver and Debt Relief Scheme, 2008.
  • Schemes have serious implications for other developmental expenditure, having a much larger multiplier effect on the economy.

Why loan waiver cannot stop suicides ?

  • Loan waiver has a limited outreach
  • Loan waivers benefit only those farmers who have availed institutional finance
  • Informal lending is not covered

Mains bits : What needs to be done?

  • Enhance non- farm income: The sustainable solution to indebtedness and agrarian distress is to raise income from agricultural activities and enhance access to non-farm sources of income. The low scale of farms necessitates that some cultivators move from agriculture to non-farm jobs.
  • Improved technology, expansion of irrigation coverage, and crop diversification towards high-value crops are appropriate measures for raising productivity and farmers’ income. All these require more public funding and support.