The Agriculture Debt Waiver & Relief: Good Politics but Bad Economics?

The one issue which has hogged most of the limelight in this year’s budget proposal is the plan to waive off agricultural loans for some farmers. Before we analyse the merits of the proposal, let us understand what the proposal itself is.

Para 73 of the budget speech pronounced two key debt relief packages to farmers:

1. For marginal farmers (those holding upto 1 hectare) and small farmers (1-2 hectare), there will be a complete waiver of all loans that were overdue as on December 31, 2007 and which remained unpaid until February 29, 2008.
   
   
2. In respect of other farmers, there will be a one time settlement scheme for all loans that were overdue as on December 31, 2007 and which remained unpaid until February 29, 2008. Under this scheme a rebate of 25% will be given against payment of the balance of 75%.
   Government estimates indicate that about three crore small and marginal farmers and about one crore other farmers will benefit from the scheme. The total value of overdue loans being waived is estimated at Rs.50000 crore and the interest write-offs through one time settlement would amount to an estimated Rs.10,000 crore.

While all political parties welcomed the proposals loud and clear, economists and other experts on agriculture seem to have mixed viewpoints. In fact, an expert Committee under Dr. R. Radhakrishna, setup to examine all aspects of agricultural indebtedness, had made a number of recommendations but stopped short of recommending waiver of agricultural loans. Contrary to what the committee had recommended, however, the government has recommended write-offs. The primary source of the problem in most parts of India comes from the fact that bank credit is either not accessible to farmers and where it is accessible, many marginal farmers are not creditworthy given their unsure incomes and few or no assets to mortgage. Hence most of these farmers move into the clutches of the local money lender who charges interest rates anywhere between 24-36%. This is 3-4 times the interest rate which banks have been charging farmers in the last one year.

Hence the solution in the long run depends on making bank loans more accessible and available to all farmers. But if that is the long term solution, surely the distressed farmer who continues to face higher input costs (fertilizers, pesticides), expensive credit and worst of all, the vagaries of the monsoon, does need succour. After all if these small farmers fail to pay back the present bank loans, they will be forced out of the banking credit system and into the hands of the money lender. This definitely will only worsen the problem. Moreover, these unpaid loans will turn into Non Performing Assets (NPAs) in the books of the banks. Hence the write-off provides much required support to the small farmer. It also provides an opportunity to the banks to clean their books as the government will pay back the banks for the written-off loans.

The key argument against the write-off is that those who have already paid back the loans must be feeling foolish; this has disincentivised their good behaviour, while those who are likely to avail the waiver benefit may be further encouraged into the habit of default – not paying back interest and principal on future loans. This argument of moral hazard may not be illogical, but the reality in most cases is different. The farmer is aware of his long term relation with banks and would not like to be categorized as a bad customer and is also aware that such waivers are unpredictable in terms of when they occur. Hence to argue that most farmers will deliberately become delinquent looks far fetched. The present plan therefore looks to be both good politics and also not-so-bad economics, at least in the short run.

Most importantly, the present loan waiver provides a much needed helping hand to the farmer and also a good opportunity to the banks to clean up their accounts. Yet the farmers of Vidarbha and Andhra who have been forced to suicides due to indebtedness – owing to the high interest costs of money borrowed from private money lenders and the risky nature of agricultural business – may not find much help from the present scheme. In the long run what will work is greater access to bank credit and making the farmer more creditworthy by improving agricultural infrastructure.

By Srinivasa Rao