Loan waivers are a band aid, not cure

The debt forgiveness in Uttar Pradesh augurs a bumper financial harvest for farmers. At a total cost to the government of Rs 363.59 billion ($5.6 billion), 21.5 million small- and marginal farmers in the state are being handed waivers on loans of up to Rs 100,000.

But indebtedness is a problem that is most acute among small and marginal farmers. Their borrowings are mainly from moneylenders and hence loan waivers won’t make any difference to them. In reality, bigger farmers are the main beneficiaries of debt relief polices.

The problems of small farmers are complex and require a steely political will to be properly addressed. Their landholdings are below the threshold that is economically viable. The result is a cycle of bad loans and bad harvests following poor rainfall.

Experts argue loan write-offs are a disincentive to the banking system because people have expectations of future waivers as well. As such, future loans given often remain unpaid. The borrowers see value in strategic defaults. While it is important for banks to make credit available to farmers so that they can leverage and do better, it is also important to maintain a credit discipline. Loan waiver schemes vitiate the credit culture and make it tougher for banks to continue lending to these segments. They create moral hazards in the financial system by rewarding those farmers who default on their loans, offering nothing to those who pay.

“The government knows we will take out more loans in the end and fall in the same trap again and will withhold repayment of these loans too. Waiting for the next election for the loan to be waived,” said Vithal Mhaski, a cotton farmer in Maharashtra who is Rs 77,000 in debt.

Bankers rue that large chunk of farm loans goes only to buy seeds or fertilisers, rather than on mechanisation. India is the world’s second-biggest producer of rice, wheat, cotton and sugar, but its productivity is way below the world average. Bankers bemoan the rise in “willful” defaults among those taking agricultural loans and using them to marry off their daughters, become lenders themselves, build extensions for their farmhouses, or lavish these loans on social occasions.

Loan waivers have little role in ending the conditions that lead to such problems.

In a sense, this is a story of unfinished reforms in India. The question should be why almost 55 per cent of the population produces just 17 per cent of agricultural output. Unless this huge swathe of the population is empowered, loan waivers will remain a recurring feature of the landscape.

Small farmers have little access to technology, and inconsistent access to irrigation, making them one of the most vulnerable groups to future climate change. Farming for them is grindingly physical work. Families plant, pick, harvest and haul by hand, with each new generation dividing up what they have into ever smaller plots of land.

Years of market-oriented reforms have unleashed a wave of capital and entrepreneurialism across India. But despite high-end sectors such as information technology making impressive strides and adulatory portrayals of India at home and abroad as an economic juggernaut, the benefits of reform have yet to extend to the hundreds of millions who toil on the land.

Two decades back, decade ago, the government embraced the global marketplace and began cutting farm subsidies as it liberalised what had long been a managed socialist economy. The farmers’ costs rose as the tariffs that had protected their products were lowered.

A sense of deep despair runs through the lives of farmers in India. They have lost all hope — and also the will to fight. An increasing number have opted for permanent escape from their physical and emotional pain by ingesting deadly pesticides.

More than seven decades after Independence, India does not have a national agriculture policy. There is a need for an integrated one. Compartmentalised responses are unlikely to be adequate to address the current crises.

Increasing stress is being laid on use of technology. It may be noted that in India, we have fragmented land holdings and small farms are not suitable for using these equipment. Farmers can cluster themselves into cooperatives or collectives and undertake collective farming. Contract farming should be promoted, in which farmers cooperatives and corporate can pool the land and simultaneously farmers can be granted a minimum amount in return along with share in profits.

Farmers need to diversify into integrated agriculture to reduce vulnerability to economic and environmental shocks. The government has to encourage animal husbandry, fisheries, horticulture, etc., and create basic infrastructure for this.

India needs to seriously overhaul its agricultural policy. First, to tackle the growing fragmentation of farmlands, India’s arcane land laws need to be loosened up to allow more land to be leased. Small farms are among the biggest hindrance to capital investments.

Second, it seems one of the biggest reasons for the slow productivity growth in agriculture over the past two decades is the reduced roles of extension workers, who help farmers, adopt innovations. In an age where farming has become riskier and more complicated than ever before, public investments in rejuvenating a cadre of extension workers will help manage volatility better and provide a boost to farm growth.

Third, the long chain between the farm and retail markets must be shortened by encouraging retail firms and aggregators to tie up directly with farmers. A stable and profitable relation between the two sets of participants will encourage investments across the supply chain.

The decisions and actions that the country’s leadership takes — or fails to take — now may shape the future not only of India’s agriculture but its polity as well.

India’ first Prime Minister Jawaharlal Nehru said in 1947, “Everything can wait, but not agriculture.” But what India is witnessing is exactly the reverse. All the paths of Indian economy are surging ahead. Agriculture is the solitary one that is beating a path back in retreat.

The writer is a well-known banker, author and Islamic researcher. He can be reached at moinqazi123@gmail.com