RBI's Raghuram Rajan says debt waivers ineffective, constrains credit flow

Putting a question mark on the effectiveness of government’s farm debt waiver programmes, RBI Governor Raghuram Rajan on Saturday said such schemes have constrained flow of credit to farmers.

“In some states on certain occasions we have had debt waivers. How effective these debt waivers have been? In fact, the studies that we have typically show that they have been ineffective. In fact, they have constrained the credit flow post waiver to the farmers,” he said at the annual conference of Indian economic association.

On farmers’ suicide, he said there was need to study this important and sensitive issue.

“One question is how else we should deal with over indebtedness in the farm sector. Also worth examining very important issue is of farmer suicide. How much they are caused by indebtedness especially to the formal (banking) system, how much formal system alleviates indebtedness…,” the governor said.

Andhra Pradesh and Telangana governments have declared loan waivers for the farmers hit by cyclone Phailin last year.

While the Telangana government has given the mandated 25 percent of the written off loan amount to the banks, Andhra Pradesh has not done it so far.

Banks have over Rs 1.3 lakh crore exposure to the farm sector in these two states.

In 2008, the then UPA government at the Centre had come out with Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS) 2008 under which 3.69 crore small and marginal farmers and 60 lakh other farmers were given debt relief to the extent of Rs 52,516 crore.

Government auditor CAG had found in several cases that ineligible farmers were given benefit while deserving were left out, pointing to large-scale possibility of fraud.

Talking about subsidies for farm sector, Rajan said that it will be useful to see whether these subsidies have actually helped agriculture or not.

“…The positive aspect is that you are giving a benefit, a cheap credit to agriculture. The concern, however, is whether this credit is being put to right use or is it leading to over indebtedness or distortionary investment.

“We, for example, have crop loan that we have subsidised. But we don’t subsidise longer term loans. Does that change the nature of what kind of activities are subsidised in agriculture? So that’s one issue…,” he added.

PTI