Taxes & Economics

Indian Agricultural Debt Waivers: A Dangerous Economic Risk?

Guest Submission by Khush Patel

Four months after the announcement of the Rs44,000-Crore Rupee Agricultural Debt Waiver Scheme proposed by the Karnataka government (approximately $6 Billion USD) Rajasthan, Madhya Pradesh, and Chhattisgarh have also announced farm waivers amounting to 31,000 crore rupees ($4.4 Billion USD).

In the year 2017, the governments of UP and Maharashtra announced waivers amounting to a staggering 80,000 crore rupees (11.4 billion $). But the question is: do these waivers actually help the farmers?

The first ever nationwide farm loan waiver was announced in 1990 and cost the state Rs10,000-Crore. But the effects were not all rosy for the farmers.

A working paper by the Indian Council for Research on International Economic Relations (ICRIER) stated that the years after the waiver “witnessed a decline in the recovery rates by financial institutions, as farmers believed that they could default with impunity. It affected rural credit with defaults of such a high magnitude that it took the banks several years to recover from its impact.”

When a farmer’s loan is waived off by the bank, the chances of that farmer getting subsequent loans from the same banks is at great risk, since the farmer is now a risky borrower. Given how a farmer’s income is often at the mercy of many factors (like monsoons, dwelling groundwater, rising electricity bills and fertilizer prices, irregular power supplies, and the minimum support price offered by the government for their produce), the difficulties that farmers deal with in India never end.

Since farmers depend upon middlemen to sell their products, they rarely get good enough prices for their products and hard-work. Income for farmers in India is often not enough to cover for their expenditures, which has compounded into a crisis where farmers continue to get into further debt. Since the banks won’t offer loans to “risky customers,” their only option is often the private money of lenders who charge interest rates of anywhere between 60% and 120% annually.

Reserve Bank of India Governor Urjit Patel, on Thursday April 6, 2017, commenting on the Agricultural Debt Waivers program, warned that these farm loan debt waivers are simply a “quick fix,” and said that they will lead to a lasting adverse impact on farm productivity.

In light of the recent waivers, economists caution that farm loan waivers would widen the Indian fiscal deficit, something that the government has aimed to cap at 3.3 percent of its gross domestic product (GDP), or Rs 6.24 lakh crore.

One of the critical issues seems to be that farm waivers are a way for political parties to gain an upper hand before elections. As the 2019 Indian General Elections are fast approaching, all political parties are in a frenzy to appease their farmer constituents, who are often a large, gainable block of their voting base.

This trend needs to be halted, and more innovative and effective solutions to farmers’ debt problems need to be implemented. Measures such as raising funding supports (subsidies), price controls for staples such as rice and wheat, increasing investment in irrigation facilities to maximize efficiency, and providing farming supplements at the village level, are all ways that the Indian government could begin alleviating their agricultural debt crisis.

Lasting solutions like building up irrigation capabilities, cold storage chains, increased crop insurance coverage, farm infrastructure investments, automation and technology investments, and opening the sector to broader domestic and international markets, could also help alleviate some of these issues.

Political parties in India need to come together, putting aside political rivalries, to come up with an effective solution to the issues that have arisen in part because of the agricultural debt waiver program. Instead of politicians using these programs as a political tool, and unknowingly stoking the fire of a potential economic crisis, Indian politicians should be acting swiftly to make their agricultural sector more efficient.

About the Submitting Author

Khush Patel

I am a high school student deeply interested in world affairs, and I strive every day to understand the world I live in better.

Citations and Sources

Indian Council for Research on International Economic Relations (ICRIER), Credit Policy for Agriculture in India – An Evaluation

This article has been edited by a Youth Journal Editor before publishing. Some sentences have undergone phrasing, spelling, and grammatical revisions.

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