Loan Waiver is no free lunch

The issue of farm loan waivers is delicate as it places economic rationale and humanistic emotions on a single platform to seek convergence in views. As the highest level of poverty is in this sector, one tends to move away from economic considerations and focus more on the human aspect when arguing for such waivers.

Several states have announced loan waivers starting from Uttar Pradesh to Maharashtra and Madhya Pradesh, with the contagion likely to percolate to the other states as it becomes almost essential to do so to ensure that the farming community is placated. The interesting feature here is that the idea of a waiver had sprung just before the UP elections when it was made a political issue. Ironically, not writing off loans to farmers now by any state will be viewed as being anti-farmer and hence a negative. It may hence be expected to become a practice across all regions. Therefore, for the purpose of argument, the political factor has to be kept aside as almost anything can be justified on these grounds. 

A loan waiver scheme is one where the government announces that all or certain categories of loans are written off by the banks on grounds of farmers going through hardships due to two successive years of drought in 2014 and 2015. The cost is borne fully by the government here and hence the banks would be theoretically compensated for writing off these loans and would not have to bear any loss. However, as governments have to pay from the Budget they stand the risk of pushing fiscal indicators into disarray. The Centre has distanced itself from such loans and hence states have to bear this cost on their own account this time. Their ability to bear this cost depends on the fiscal space that they have as they cannot borrow more than 3-3.5 per cent of their GSDP based on the Fiscal Responsibility and Budget Management (FRBM) rules. Therefore, any allocation for these loan waivers will mean reduction in spending, which has to fall on discretionary expenditure that involves infrastructure.

The three stakeholders here are farmers, governments and banks. Each of them has to look at this scheme from different angles.

From the point of view of farmers, the real task is in identifying the right persons when invoking a loan waiver scheme. Should it be only the small and marginal farmers or should it also include the medium and large-sized ones? Last time it was 100 per cent for marginal farmers and 25 per cent for larger farmers provided the balance 75 per cent was paid. Should it be only farmers whose crops are affected by the drought or should everyone be included? By making it inclusive, the canvas widens. Ideally it should be linked to the crop which was affected by the drought to have it better targeted. The selection of right farmers’ groups becomes important as the money involved is large. If it is extended to all farmers, then the moral dilemma is whether or not we are penalising those farmers who have been servicing their debt on time. If so, then there would be a perverse incentive for them to renege on their obligations in the hope that there would be future loan waivers. The last waiver on a large scale involved around Rs 50,000 crore under the UPA regime in 2008. Therefore, even if beneficiaries are identified, the government has to ensure that defaults don’t become a habit in future.

From the point of view of the state governments the invoking of such a scheme has negative implications for fiscal balances. States perforce cannot exceed the 3 per cent fiscal deficit target or 3.5 per cent for some of them which have better fiscal records. Most of them are operating at the periphery of these limits and hence will find it hard to extend such schemes unless they cut back on capex. This will be negative for economic growth because now it is only the Centre and state governments which are in a position to spend money on infrastructure. Any deviation in the expenditure to waivers will necessarily mean a slowdown in growth in investment.

 

Besides, states have already been pressurised under the UDAY Scheme where the debt of DISCOMs has been taken over by the states. Here the debt has been transferred to the states which have been forgiven on the fiscal deficit norm for the current year. However, they would have to service the same and will also have to finally make the repayments. Taking on the task of providing for the waivers though politically expedient would pressurise them.

The third stakeholder, i.e. banks would not find this scheme agreeable. Hence, the loan waiver scheme will set a precedent for the future and while it can be morally be justified on humanitarian grounds, will affect the economics of the same besides denting the credibility of the financial system. Therefore, ideally this should not be encouraged. Instead, all farm loans repayment on account of a drought should be addressed through an insurance scheme (which exists, but is not used) so that in case of monsoon failure, it can be invoked for payments. Having the government pay this premium is a better option than writing off loans. This would be a better way of going around things. 

Chief economist, CARE Ratings. Views are personal.