The Problem with Farm Loan Waivers

The farmers of the affluent Indian state of Maharashtra are once again protesting. The reason behind their protests is that they want their farm loans to be waived off. Farm loan waivers are not at all new to India.

The past Prime Minister, Dr. Manmohan Singh won a second term because he waived off loans worth Rs. 72,000 crores. More recently farm loans have been waived off in states like Uttar Pradesh and Tamil Nadu.

Since farm loans have been waived off in the past, farmers are trying to pressurize present governments to give in to their demands. However, the situation has become so grave that RBI governor Urijit Patel had to intervene in the matter. He has asked all political parties to resist the temptation to waive off loans using public money for electoral gains.

In this article, we will have a closer look at these farm loan waiver schemes and how they affect the economy.

Political Benefits

Farm loan waivers have been linked to political benefits for a long time now. The reason is that farming community forms the majority of the vote bank in India. About 70% of the population depends on agriculture for their subsistence. As a result, if this community is unhappy with a government, they are likely to lose the election. This is what happened to the BJP led government in 1999 wherein they failed to get the farmers on their side. The other political party, i.e., Indian National Congress has used farm loan waivers and schemes such as rural employment guarantee scheme to their benefit. However, these schemes cause massive losses to the exchequer. Hence, it is imperative that the banks, as well as the governments, stop waiving off loans if the nation has to stay solvent.

Moral Hazard

The biggest issue with loan waivers is that it promotes irresponsible behavior. Consider the case of two farmers. One farmer has been diligent with his/her money and has made all repayments on time. On the other hand, the second farmer has not made any repayments on time.

However, due to political pressure, the second farmer is also able to discharge his debt without making any payment. Obviously, this would leave a bad taste in the mouth of the first farmer.

The next time, the first farmer will also start obtaining loans and willfully defaulting on them. Later, these farmers can also use the political clout of the farming community to escape without paying the debt.

This is exactly what is happening right now in India. Many farmers are obtaining farm loans and using them for non-agricultural purposes. When they are unable to pay off the loan, they start using political organizations to get their loans waived. If this behavior is encouraged, very soon 100% of the farm loans will be in default.

Fiscal Deficit

Obviously, banks cannot lose money on their loans. If they have made loans, then they have to recover the money somehow. Hence, if the farmers are not able to pay back the loans, the government has to step in and make the payments. The problem is that the government itself does not have the money to pay the loans.

The government makes the payment by borrowing money from financiers. This money adds to the national debt and has to be paid back with interest.

Many economists are concerned that farm loan waivers will have an adverse effect on the already fragile fiscal deficit situation in India. The problem with farm loan waivers is that it puts more pressure on the tax payers in India.

Less than 3% of India’s population pays taxes. If popular measures like farm loan waivers are enacted more often, these taxpayers may try to exit the country to avoid paying off other people’s loans.

Developing Infrastructure

The problem with farm loan waivers is not the amount of money which is spent. Instead, the manner in which this money is spent is incorrect. If the waivers given by all governments are combined, the amount of money spent will exceed the amount of money spent in building agricultural infrastructure. This is inefficient utilization of resources.

Had the money been spent on infrastructure instead, the need for farm loan waivers would have been drastically reduced in the future. At the present moment, the state has already lost a lot of money. However, the problem has still not been fixed. Farm loan waiver is simply a populist move meant to garner more votes. From an economic point of view, it is a complete disaster.

Crop Insurance

Crop insurance is an effective way of preventing farmer insolvencies due to poor monsoons. This model is successfully working in many parts of the world where the economy is dependent on agriculture.

If the government wants to help the farmers, it can subsidize the payment of insurance premiums and encourage enrollment into this scheme. At the present moment, many farmers are taking farm loans for non-agricultural purposes. Later, they blame the weather and the poor yield to apply political pressure and to get the loans waived off.

To sum it up, farm loan waivers are not good for the economy. They benefit one section of the economy at the expense of everyone else. Such schemes are likely to promote more delinquency since people will start believing that they can get away with non-payment of loans.

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