Opinion

Is India faced with a 3.1 lakh crore farm-loan waiver? And will it help?

By Alison Saldanha & Prachi Salve

As demands for farm-loan waivers grow across Punjab, Haryana, Tamil Nadu, Gujarat, Madhya Pradesh, and Karnataka — after Uttar Pradesh and Maharashtra wrote off loans worth Rs 36,359 crore and Rs 30,000 crore, respectively — India faces a cumulative loan waiver of Rs 3.1 lakh crore, or 2.6 per cent of its GDP in 2016-17.

A waiver of this scale could pay for the 2017 rural roads budget 16 times over or pay for 443,000 warehouses or increase India’s irrigation potential by 55 per cent more than the achievements of the last 60 years.

While such waivers could provide succour for 32.8 million indebted farmers, an IndiaSpend analysis of the impact of previous farm-loan waivers indicates such bailouts are band-aids of uncertain efficacy and do not address a deeper malaise gripping the agrarian economy.

Over nine years to March 2017, the central and state governments waived Rs 88,988 crore in loans to 48.6 million farmers. The nationwide Rs 52,000 crore loan-waiver announced by the United Progressive Alliance (UPA) in 2008 occupies the bulk of this figure.

The waivers were primarily meant to discourage suicides by farmers, apparently caused by widespread indebtedness. However, our analysis shows this had little or no impact on suicide rates, probably because 32.5 per cent on average, or 79.38 million, small and marginal farmers across India (with farm holdings of less than 1 to 2 hectares in size) rely on informal sources of credit.

Meanwhile, loan waivers have led to a rise in the non-performing assets (NPAs) of banks, especially public-sector banks, and are likely to have a significant bearing on the state and national fiscal deficits. In 2013, agricultural NPAs accounted for about 41.8 per cent of “priority sector” (which also comprises micro and small enterprises, affordable housing, and student loans) NPAs in public and private banks — up from 25 per cent in 2009, according to a 2015 study published in the International Journal of Science and Research (IJSR).

For example, Maharashtra’s Rs 30,000 crore farm-loan waiver for small and marginal farmers will raise the state’s fiscal deficit to 2.71 per cent, which is three-fourths (1.18 percentage points) higher than the budgeted deficit of 1.53 per cent of the GSDP for the current financial year, according to this 2017 report by ratings agency India Ratings and Research (Ind-Ra). Uttar Pradesh’s Rs 36,359 crore farm-loan is 2.6 per cent of its GSDP. The 14th Finance Commission says fiscal deficits should not exceed 3 per cent of state budgets.

About 85 per cent of all operational farm holdings in India are less than two hectares in size. Owners of these shrinking farms find it difficult to use modern machinery and are often too poor to afford farm equipment. Manual labour increases costs, and size and output further limits access to loans and institutional credit.

On average, a third of Indian small and marginal farmers have access to institutional credit. This means no more than 10.6 million of 32.8 million small and marginal farmers in the eight states demanding loan waivers could benefit from debts being written off.

The other 22.1 million farmers depend on moneylenders and relatives for borrowings, according to the 2011 agricultural census and the National Sample Survey Office’s 2013 situation assessment survey of farm households, the latest available data.

In 2007, before the UPA’s loan waiver for 30 million farmers across 18 states, 16,379 Indian farmers committed suicide, according to National Crime Records Bureau (NCRB) data.

A quarter of these suicides (4,238) were reported from Maharashtra. In 2009, the year after the loan-waiver was announced, the state government promised an additional waiver of Rs 6,208 crores. This led to a drop in farm suicides in India’s richest state; but in 2010, suicides rose again, by 6.2 per cent. By 2015, seven years after the Centre’s bail-out, Maharashtra recorded 4,291 suicides, its highest rate ever, accounting for 34 per cent of such deaths nationwide, according to the latest available NCRB data.

After the first major farm-loan waiver of Rs 10,000 crore in 1990-announced by a Janata Party government led by then Prime Minister V.P. Singh — it took almost nine years for banks to recover.

Since the 2008 farm-loan waiver, agricultural NPAs rose three times, from Rs 7,149 crore in 2009 to Rs 30,200 crore in 2013, according to a 2015 study.

These NPAs affect the credibility of lending institutions. Shares of banks fell four per cent after Maharashtra announced its loan waiver. Further, with public-sector banks (PSBs) accounting for the major share of farm credit – 52 per cent in Maharashtra, followed by 32 per cent from co-operative banks and 12 per cent in private banks — these PSBs are “more vulnerable”, said a 2017 Kotak Institutional Equities report.

Indebtedness is a symptom and not the root cause of the farm crisis, according to a 2007 expert group report on agricultural indebtedness, chaired by economist R. Radhakrishna. The average farm household borrowing has not been “excessive”, the Radhakrishna report said. The factors contributing to the farm crisis are “stagnation in agriculture, increasing production and marketing risks, institutional vacuum and lack of alternative livelihood opportunities”, the report said.

It is clear a loan-waiver alone cannot solve India’s agrarian crisis. The data reveal a more-than-necessary focus on agricultural credit, as other fundamental problems remain unaddressed.

Over a decade to 2014-15, as institutional credit in agriculture grew 547 per cent, from Rs 1.25 lakh crore to Rs 8.45 lakh crore, rural road construction — which increases access and boosts agricultural income and productive employment — grew just 10.5 per cent.

Roughly 7 per cent of total grain output, 10 per cent of seeds and between 25 and 40 per cent of fruits and vegetable — overall a third of farm harvest spoils — are wasted every year because there isn’t enough storage and supply-chain infrastructure.

Irrigation, increasingly vital in an era of climate change, has failed Indian farming. No more than 47.6 per cent of India’s farms are irrigated, and the decadal growth in net-irrigated area to 2010 was 0.3 per cent, according to Ministry of Agriculture data.

These low investments eventually make farming expensive and prices volatile.

To curb the impact of market fluctuations, Chief Economic Adviser Arvind Subramanian recommended improving the “procurement capacity” — or money available to buy farm produce — of states, lifting export bans, raising stock limit and including “risks and externalities” while framing the minimum support prices (MSP) for various produce.

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