Farm loan waivers: How India’s political parties are racing to the bottom

By Dr Amitendu Palit
Senior Research Fellow and Research Lead (Trade and Economic policy), Institute of South Asian Studies, National University of Singapore

This article is part of the Indian Election Series – a partnership between the Australia India Institute and the Melbourne School of Government’s Election Watch.

Heading into what is expected to be a very close general election in April or May of this year, India’s political parties are searching for any advantage over their rivals.

In the pursuit of votes in rural areas, writing off agricultural loans has become the preferred strategy for India’s political parties for appeasing disgruntled farmers.

State governments, desperate to retain rural votes, have been competing with each other in waiving agricultural loans. Since April 2017, ten Indian states have written off loans. These include large and populous states like Andhra Pradesh, Karnataka, Madhya Pradesh, Chhattisgarh, Maharashtra, Tamil Nadu, Punjab, Assam, Telengana and Uttar Pradesh.

The total amount of loans waived off by these states are around Rs 1.7 trillion, roughly one percent of the country’s total GDP of Rs 168 trillion. More states might join the race as the general election draws closer.

Loan waivers have become  more popular since  the electoral reverses suffered by the Bharativa Janata Party (BJP) in various state elections last year. In states such as Karnataka, Madhya Pradesh and Chhattisgarh where the BJP lost, incoming Congress Party governments announced debt write-offs. Congress Party President Rahul Gandhi has demanded a national loan waiver scheme and has urged Prime Minister Modi, of the BJP, to write off all farmer loans.

The Congress Party, though, is not the only party demanding cancelling of farmer’s loans. The BJP-ruled states of Maharashtra, Uttar Pradesh and Assam had earlier announced loan waiver schemes. As had states ruled by non-Congress & non-BJP regional parties, such as Andhra Pradesh, Telengana and Tamil Nadu.

With Parliamentary elections less than four months away, there is a strong possibility of a national loan waiver scheme being announced by the BJP. Such schemes have been announced twice in the past. The first was in 1990 by the coalition National Front government led by Prime Minister V P Singh, followed by the Congress-led United Progressive Alliance (UPA) government under Prime Minister Manmohan Singh in 2008.

Competitive populism might see more and more promises for loan waivers in the run-up to the general elections. But unfortunately, these waivers are unlikely to make major differences to economic conditions of farmers for several reasons.

A misguided approach

First, debt relief would benefit only a small section of indebted farmers. About a third of agricultural households in India have institutional loans. The rest obtain loans from informal sources. Scrapping outstanding bank loans wouldn’t benefit these farmers. Furthermore, even among farmers that might benefit, requirements of exhaustive documentation for qualifying for waivers, might deny the benefits for many. These bureaucratic impediments are responsible for the tardy progress on the previously announced loan waivers.

Second, cancelling farmer loans doesn’t make a difference to the prospects of agricultural labourers. These landless agricultural labourers contribute labour to cultivating farmers and comprise more than half of the rural workforce. Since they are not cultivating farmers and therefore not eligible for institutional loans, loan waivers would not influence their economic prospects.

Third, forgiving loans sets a bad precedent for farmers sincerely servicing loans and repaying on time. The anticipation of loan waivers becoming a settled practice makes borrowing farmers less attentive towards repayment obligations. On the other hand, banks too become sceptical about recovering future loans. This can make banks more rigid in lending to farmers leading to lower flow of bank credit to the agricultural sector.

Lastly, in their eagerness to capture rural votes by promising loan waivers, state governments overlook the damage to state exchequers. It is eventually the state government budgets that absorb the costs of writing off loans. All states that have announced waivers have experienced increases in budget deficits depending upon the size of the promised write-offs. More such waivers by states, along with the possibility of a national loan waiver programme, would adversely affect financial conditions of both state and central governments.

The core issue: Declining rural incomes

The most unfortunate aspect of the rush for loan waivers is the lack of interest of political parties in addressing the core issue behind India’s rural distress: declining farmer incomes. Loan waivers, at best, can provide temporary relief for indebted farmers. The indebtedness is a result of farmers getting low prices for their crops and therefore not being able to recover the costs of cultivation.

The need of the hour is to ensure farmers earn enough by getting right prices for their crops. Loan waivers cannot fetch farmers’ remunerative prices.

Waivers are nothing but populist efforts by Indian political parties to grab rural votes without paying heed to implementing policies for improving long-term economic prospects of farmers.

These include amending state Agricultural Produce Marketing Committee (APMC) Acts allowing farmers greater options for selling their produce and inviting large-scale investments in modernising rural infrastructure like creating cold storage and warehousing facilities. The former would upset intermediary traders. The latter would also upset trading lobbies as it would entail inviting large foreign retailers in agricultural food chains.

Farmers’ economic interests are certainly not uppermost in calculations of political parties in promoting loan waivers. Short term political gains are driving an economically fatal race to the bottom.

Dr Palit will be giving a public lecture on this topic on Tuesday 5 February at the Sydney Myer Asia Centre in Melboure. Click here for more details.

Banner Photo: Courtesy of Rajesh Pumnani via Flickr.


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