Madhya Pradesh, Chhattisgarh farm loan waivers: Politics of sops can kill an economy; fiscal indiscipline no pathway for poll wins

Soon after being sworn in as the chief ministers of Chhattisgarh and Madhya Pradesh, Congress leaders Bhupesh Bhagel and Kamal Nath passed official orders waiving farmer loans for their states.

Doling out farm loan waivers is the new fad with politicians in India. Instead of probing for a long-term solution for the agricultural distress, politicians have resorted to the easiest and definitely not the most sustainable way of helping farmers.

Farm loan waivers are not new to the Indian economy. In 2008-09, the UPA-I government announced a farm loan waiver of Rs 60,000 crore. It hit the exchequer and although the banks were insulated, it did distort the credit culture of the country since it discouraged farmers from paying up their dues.

In addition, when one state offered a waiver, it raised expectations for others too. Since 2014, starting with Andhra Pradesh, several states joined the farm loan waiver bandwagon, with Uttar Pradesh and Maharashtra being the most recent ones, though Centre has maintained that states have to deal with farm loan waiver from their own budget and Centre would not assist states in this matter.

Apart from Madhya Pradesh and Chhattisgarh, other states which have announced farm loan waiver so far are -- Maharashtra, Uttar Pradesh, Tamil Nadu, Karnataka, Jammu and Kashmir, Punjab, Andhra Pradesh, Telangana and Puducherry.

 Madhya Pradesh, Chhattisgarh farm loan waivers: Politics of sops can kill an economy; fiscal indiscipline no pathway for poll wins

Representational image. Natasha Trivedi

While Madhya Pradesh chief minister Nath cleared a proposal for waiving farm loans up to Rs 2 lakh, fulfilling a promise made by the Congress ahead of the Assembly polls that is widely believed to have tilted the scales in its favour, Baghel said his government will waive short-term agricultural loans of farmers and hike the MSP for paddy to Rs 2,500 per quintal.

"The Madhya Pradesh government has taken a decision to write off short-term crop loan of eligible farmers up to the limit of Rs 2 lakh, as on March 31, 2018, from nationalised and cooperative banks," the order stated.

Rajesh Rajora, principal secretary, Farmers' Welfare and Agriculture Development Department said that an estimated 34 lakh farmers will benefit from the loan waiver whose size he pegged between Rs 35,000 crore to Rs 38,000 crore.

Income taxpayers and government employees are not eligible for loan waiver, the senior bureaucrat said. Justifying his decision to waive farm loans, Nath asked that when nationalised banks can write off 40 to 50 percent loans of big industrialists, why cultivators can't get the same relief.

In Chhattisgarh, the short-term crop loans to the tune of over Rs 6.10 crore of more than 16.65 lakh farmers drawn from cooperative banks and Chhattisgarh Gramin Bank as on 30 November, 2018 will be completely waived, Baghel said.

The state cabinet also decided to examine the short-term agriculture loans taken by farmers from notified commercial banks and accordingly, the loans of eligible farmers will be waived, the chief minister said. On the MSP (minimum support price) for paddy, he said it is being procured through primary cooperative societies at Rs 1,750 per quintal a rate fixed by the Central government. The remaining Rs 75 per quintal will be borne by the state government, he said.

If the amount of Rs 300 per quintal, which is currently being given as a bonus, is merged with it (Rs 750) only a burden of Rs 450 per quintal remains, he said. "The state government would bear the burden of Rs 750 per quintal and procure paddy at Rs 2,500 per quintal," he said.

Are the newly-inducted governments stepping into a minefield by announcing the waivers?

Recently, former RBI governor Raghuram Rajan said that the agricultural distress in the country is proof of the growing inequality in the country. "The question is whether the flows to farmers are best affected by waiving loans. After all, there is only a subset of farmers who get those loans. So it often goes to the best connected rather than those who are most poorly off," Rajan said in a report, An Economic Strategy for India, he co-authored with other economists.

The success of the waiver lies on the extent to which the benefits reach the farmers who need it the most. Loan waivers suffer from several drawbacks in this respect. First, it covers only a tiny fraction of farmers. Secondly, farmers investing from their own savings and those borrowing from non-institutional sources are outside the purview of loan waiver. Loan waiving excludes agricultural labourers who are even weaker than cultivators in bearing the consequences of economic distress. According to 2012-13 NSS-SAS, 48 percent of the agricultural households did not have any outstanding loan.

The scheme is prone to serious exclusion and inclusion errors, as evidenced by the Comptroller and Auditor General’s (CAG) findings in the Agricultural Debt Waiver and Debt Relief Scheme, 2008.

Experts have argued that the state and the Central governments need to think beyond waiving loans and instead strengthening the repayment capacity of the farmer. In the past year or so, waiving farm loans has been majorly used as an election pitch, especially after unhappy and frustrated farmers spilled on to the streets protesting against government's anti-farmer policies. Recent farmers protest in Delhi, the Mandsaur incident where at least five farmers were gunned down during a protest are a few examples when farmers' groups marched hundreds of kilometres to showcase their plight.

But instead of a deep analysis of the problem, we have witnessed states announcing farm loan waiver at the drop of a hat. Rajan, in the report, also mentioned the financial burden that the states incur after announcing similar sops. According to Economic Survey 2016-17, the fiscal health of states deteriorates with the rise in fiscal deficit and primary deficit.

In its recent report on the states' finances, the RBI also pointed to the worsening position of their financial health. It noted that the consolidated finance of the states had deteriorated in recent years with the gross fiscal deficit to GDP ratio averaging 2.5 percent in the last five years (from 2011-12 to 2015-16), compared with 2.1 percent during the previous five-year period. According to a report by the State Bank of India, the impact on Punjab will be the maximum, with the state’s fiscal deficit jumping by an additional 4.8 percent of the GSDP.

An oped in Hindustan Times argued that such waivers help farmers only for one season and giving such sop is also not economically viable as it reduces government’s fiscal power to intervene when needed the most. And finally, states apeing each other when it comes to such freebies in a mindless manner does not make things easier because no two states are same. Rajasthan, for instance, calculates waivers based on the amount of crop damaged, size of land holdings and harvest volume. "Others have fixed limits for the amount to be waived."

Updated Date: Dec 18, 2018 16:18:54 IST