Relevance: GS-2 and GS-3: Government policies and interventions for development in various sectors and issues arising out of their design and implementation; Issues related to farm subsidies.

Key Phrases: Farm Loan Waiver, Moneylenders and Informal Credit Sources, Capital Expenditure in the agriculture sector, Fiscal deficit, Credit rating, Rejection of farmers’ claims.

Why in News?

• As per a study by State Bank of India’s researchers only about half of the intended beneficiaries of farm loan waivers announced by nine States since 2014, have received debt write-offs.

What is a Farm Loan Waiver?

• Farm loan waivers are customised schemes announced by Government(s) to help the peasants. When there is a poor monsoon or natural calamity, farmers may be unable to repay loans. The rural distress in such situations often prompts States or the Centre to offer relief — reduction or complete waiver of loans.
• Essentially, the Centre or States take over the liability of farmers and repay the banks. Waivers are usually selective — only certain loan types, categories of farmers or loan sources may qualify.
• Loan waivers, originally intended for a one-time settlement. However, the past two decades have seen such schemes announced with increasing regularity, signalling the chronic distress of the agricultural sector in India.

Key findings of the study by State Bank of India’s researchers:

• The SBI study was based on outcomes of ten farm loan write-offs worth about ₹2.53 lakh crore announced by nine States, starting with Andhra Pradesh and Telangana in 2014.
• As of March 2022, the poorest implementation of farm loan waiver schemes in terms of proportion of eligible farmers who had received the announced benefits were in Telangana (5%), Madhya Pradesh (12%), Jharkhand (13%), Punjab (24%), Karnataka (38%) and Uttar Pradesh (52%).
• By contrast, farm loan waivers implemented by Chhattisgarh in 2018 and Maharashtra in 2020, were received by 100% and 91% of the eligible farmers, respectively.
• A similar waiver announced by Maharashtra in 2017 worth ₹34,000 crores for 67 lakh farmers, has been implemented for 68% of beneficiaries.
• As many as 92% of Andhra Pradesh’s 42 lakh farmers eligible for loan waivers had benefited, while the number was a mere 5% for Telangana.
• Despite much hype and political patronage, Farm Loan waivers by States have failed to bring respite to intended subjects, sabotaging credit discipline in select geographies and making Banks and financial institutions wary of further lending.

Possible reasons:

• Rejection of farmers’ claims by State Governments
• Limited or low fiscal space to meet promises
• Change in Governments in subsequent years

Whose interest do rampant waivers serve?

• Apart from benefits not reaching the targeted farmers, the report also flagged concerns about whether they help farmers in genuine distress.
• Of the total accounts eligible for farm loan waiver, most of the accounts (more than 80% in some States) were in the standard category, begging a question of whose interest rampant waivers serve.
• The proportion of standard accounts, which refers to loans being serviced promptly by borrowers that were covered by the farm loan waiver, was particularly high in Jharkhand (100%), Uttar Pradesh (96%), Andhra Pradesh (95%), Punjab (86%) and Telangana (84%).
• On the other hand, only 43% of the farmers covered by Maharashtra’s loan waiver announced in 2020 had standard accounts, and the number was 46% for Karnataka, which had launched a ₹44,000 crore waiver program for 50 lakh farmers in 2018.

What are the arguments in favour?

• It will provide support to farmers from crop failures due to a lack of rains or insufficient market demand and will in turn reduce farmer suicides.
• Farm loan waiver schemes will divert these farmers to borrow money from banks and save farmers from borrowing money from unofficial moneylenders for high-interest rates and getting trapped in a vicious cycle of debt.
• It helps retain farmers despite better money-making alternatives other than farming.

What are the arguments against it?

• Farm loan waivers are just a temporary solution.They might help the government buy peace with farmers in the short run, however, they are unlikely to change much on the ground.
• Honest farmers, some of whom take more loans to repay earlier ones, or use their savings to repay loans, feel cheated.
• Farmers to turn into wilful defaulters due to the next loan waiver scheme, which is bad for the economy.
• The farmers who take loans from moneylenders and informal credit sources are not benefitted from such schemes.
• It increases the fiscal deficit of the State as the gross expenditure of State government exceeds the gross revenue which in turn causes low credit ranking for the State and so the cost of borrowing increases for the State.
• Rich farmers to take loans even if there is no need, in the hope of the next loan waiver scheme. This impacts the farmers who are genuinely in need of loans.
• Loan waivers increase the interest burden of the States and limit their ability to undertake productive capital expenditure in the agriculture sector. It affects the long-term growth in the sector.
• Providing loan waive in some States encourage farmers from other States to demand loan waiver even if they don’t need them.
• Loan waivers are just a tool of vote banks politics.
• Farm loan waivers affect credit-off take and induce further stress on banks.

Conclusion:

• Loan waivers destroy the credit culture which may harm the farmers’ interest in the medium to long term and squeeze governments’ fiscal space to increase productive investment in agriculture infrastructure.
• Both short- and long-term measures are required to address the numerous problems associated with the agrarian crisis.

Source: The Hindu BL

Mains Question:

Q. Critically examine the issues related with implementation of farm loan waiver schemes by the States in the light of recent study by State Bank of India’s researchers.