Farm loan waiver: Yogi Adityanath doesn't get it; it's the death of credit culture that costs the poor dearly

Following Maharashtra chief minister, Devendra Fadnavis’ example, Karnataka CM, Siddaramaiah too has ruled out a Yogi Adityanath model farm loan waiver. Even though both Karnataka and Maharashtra might eventually come under pressure to waive loans if monsoon fails this year, their initial response to the waiver demand is encouraging. Both CMs have denied the loan waiver calls citing that such measures will actually harm the farmer and not benefit him. This is a good sign for an aspiring economy and augurs well in the interest of fiscal prudence and to nurture a healthy credit culture. More importantly, it sends out a strong signal to other political leaderships in other states that are aiming to launch mass scale loan waivers to appease the vote bank. As this writer noted in an earlier piece even the BJP-ruled states like Maharashtra taking a bold step differing from the party’s national stance (particularly during Uttar Pradesh polls) was sure to influence decisions by other states facing political and public pressure to do the same. Karnataka’s response should be seen in this context. [caption id=“attachment_3190640” align=“alignleft” width=“380”]  Representational image. Reuters[/caption] On the other hand, Yogi Adityanath, who announced a Rs 36,000 crore farm loan waiver bonanza shortly after taking charge to fulfill his party’s poll promise, has sought to justify his move saying that the burden of the waiver will not fall on the common man ( read a report here). The state has made arrangements to execute the waiver and will cut short expenses to manage the burden, Adityanath said. But, the CM is missing the point here. The financial burden of this exercise was anyway not supposed to fall on the common man or even on the state exchequer directly since the government, in the very beginning itself, had said that it will issue bonds to raise funds to execute the waiver gambit. But, the fact is that there will surely be pressure on public exchequer eventually, as the waiver will remain an unstated liability on its books and will weaken the fiscal position of the state. More important point here is this. Adityanath should recall that the real impact on the common man on account of loan waivers has never been the cost of implementing the waiver itself but the death of credit culture and the moral hazard it causes even on honest borrowers for several years to come in a large geography. This sends a signal to the people that farm loans are something where repayment isn’t really necessary since the government will announce a waiver at some point. The big, instant victims will be banks which lend to these farmers. Remember, even if the loans are waived for a year, the farmer will have to go back to the bank yet again to buy seeds and fertilizers and make up his losses in the last season. And the banker will surely think twice before sanctioning the loan. If this happens, the farmer will be forced to go to the local private money lender and fall into the debt trap. Ultimately, the reason for several hundreds of farmer suicides across the country can be traced to the social ignominy the debt-ridden farmer is forced to face rather than crop losses. To avoid this, maintaining a healthy relation between the farmer and the banker is important. Loan waivers break this trust. Also, the promised benefits of loan waivers hardly reach the actual needy farmer. Small and marginal farmers, who have very small land holdings, are often left out of the exercise and only the rich-farmers benefit. The big example is the 2008 UPA-sponsored loan waiver. As repeatedly pointed out by experts, the sustainable way to get the farmer out of the debt burden is to make sure he gets support to avail the raw materials and reasonable price for the produce. If short-term financial assistance is a must, then governments can look for alternatives of loan waiver such as offering a temporary repayment holiday or reduction in interest amount. Both Fadnavis and Siddaramaiah have set good examples on this subject that should be an eye opener for politicians like Adityanath, PM Modi and Congress Vice President, Rahul Gandhi, who have been using the loan waiver promise as a political tool to win votes.