The consequences of agricultural loan waiver schemes

Farm credit is a critical support for the country’s huge farm sector as the country’s agrarian economy is the source of around 15 per cent of GDP. The farm sector also contributes to 11 per cent of exports and provides livelihood to about half of India’s population. Outstanding bank advances to agriculture and allied activities have risen from about 13 per cent of GDP in 2000-01 to around 53 per cent in 2016-17. Much of this credit flow has been propelled by the policy thrust on expanding credit to agriculture, especially through priority sector lending (PSL) stipulations. Read On ..

Multiple challenges have led to distress in the farm sector which resulted in untimely death of many farmers. One of the solutions that has been offered historically is waiver of such loans. However, there are costs of these schemes, apart from the cost to the exchequer.

After Andhra Pradesh and Telegana in 2014, five more states so far have announced farm loan waiver, including Tamil Nadu (2016), Uttar Pradesh, Maharashtra, Punjab and Karnataka (all in 2017). Beginning with Tamil Nadu in 2016, the total cost of loan waivers announced amounts to around Rs 1,30,000 crore which is 0.8 per cent of gross domestic product.

Farm loan waivers in India have been announced intermittently by both the central and state governments to provide relief to farmers facing distress due to natural calamities or crop failure.

Reserve Bank of India governor’s Urjit Patel recently said that the first major nationwide farm loan waiver was undertaken in 1990 and the cost to the national exchequer was around Rs 10,000 crores, which works out to Rs 50,557 crores at current prices using the GDP deflator. The second major waiver was under the agricultural debt waiver and debt relief scheme (ADWD) of 2008 amounting to Rs 52,000 crores (0.9 per cent of GDP) or Rs 81,264 crores at current prices using the GDP deflator. Unlike the 1990 scheme that aimed at providing blanket relief to all farmers up to a certain loan amount, the 2008 scheme waived debt for certain classes of cultivators.

In 2014, Andhra Pradesh and Telangana announced farm loan waiver of Rs 24,000 crores and Rs 17,000 crores, respectively. In April 2017, UP announced a farm loan waiver scheme, to the tune of Rs 360 billion – around 2.5 per cent of UP’s Gross State Domestic Product (GSDP). Maharashtra has since announced a loan waiver scheme for farmers amounting to Rs 340 billion. Similarly, Punjab has announced a waiver on crop loans benefitting small and marginal farmers (for which a provision of Rs 15 billion has been made in the state budget for 2017-18) while Karnataka has announced a loan waiver amounting to Rs 81.65 billion for farmers availing of farm loans from cooperative banks.

Apart from these states, several others are contemplating loan waivers with the intended waiver amounts ranging between Rs 400 - Rs 570 billion.

One of the main problems with such schemes is that it distorts the credit culture.

“We feel that in case of a (farm) loan waiver, there is always a fall in credit discipline because the people who get the waiver have expectations of future waivers as well. As such future loans given often remain unpaid,” Arundhati Bhattacharya, chairman, State Bank of India had said.

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When such a scheme is announced in one state, borrowers of neighbouring states hold back their payments to banks in anticipation of such a scheme in their state too. This has adversely impacted bank’s balance sheet during the April-June quarter as many banks have seen almost 60% of the incremental non-performing loan came from the agricultural portfolio.

Farm loan waivers also add to the fiscal burden over the medium term as they are essentially a transfer from tax payers to borrowers. This has an implication on fiscal deficit which finally impacts the interest rate which impacts everyone in the economy adversely.

This is because a state that has offered a farm loan waiver will have to borrow more from the market. If the overall borrowing increases, yields on state development loans (SDL) may firm up posing higher interest burden for the states in future.

At the same time, such additional borrowing can also crowd out private borrowers as the general cost of borrowing increases with pressure from higher government borrowing on the finite pool of resources that can be invested in the economy.

And of course such schemes will push prices up which will impact everyone. According to a RBI study, if the combined fiscal deficit for 2017-18 goes up by 40 bps on account of farm loan waivers, with the budgeted combined fiscal deficit at 5.9 percent for 2017-18 and inflationary momentum remaining benign, this may lead to around 20 bps permanent increase in inflation, starting 2017-18.

- TradeBriefs Bureau - 

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