A Critical Look At The Farm Loan Waivers

This post was originally written as a Quora answer in November 2018.

Here’s my take: Farm loan waivers are populist measures, instruments to win elections, mechanisms to sound farmer-friendly without putting too much thought into what the farmer really wants. They hurt poor farmers. They are bad for the credit culture in the rural banking system. They are bad for the fiscal health of the states & they may also prevent the states from investing in Infrastructure which might have helped farmers in the long run.

That said, the farm loan waiver is sometimes necessary. If it is to be followed by meaningful agriculture reform, it can help the farmers in the long run. The loan waiver is the first step because farmers can make use of the reformed environment only when they are not in debt. It is not as if farmers are doing it because it’s their “passion” to toil in the soil. Farming is their only source of subsistence. Keeping in view the policies to keep food prices in check, the larger population actually owes a debt to farmers.


A frustrated farmer in the movie Peepli Live says:

So what good is farming? American seeds, American fertilizers. Pay for it, then pray for the rain. They are shoving farming up our arse.

As the curtain unveils, we see Nattha running away from someone. It turns out to be a dream. Nattha and Budhia, are on their way back home.

Budhia can’t pay back his loan but the bank is resolute to recover their money. As Budhia doesn’t sell diamonds, we know the bank will have its way. It is going to sell his land, the land that his forefathers had passed on to him, the land that was his only source of livelihood. A song by the Indian Ocean starts running in the background.

A Still from the Movie Peepli Live

Budhia decides to commit suicide. A loan waiver could have prevented him to take that decision. While the movie ends very differently, it can make us a bit empathetic towards the plight of farmers in India.

The movie also shows how Budhia & Nattha spend their money on liquor even when even they cannot afford to splurge this way. This is one of the ways loan waivers are criticized. “Oh, they spend all their money on either liquor or lavish weddings. They don’t need loan waivers”, said my father while we watched a 48-year old “young” politician affirm that loans will be waived the very day they come in power.

“But don’t the rich do the same?”, I retort back. Vijay Mallya is probably having his drinks right now, & enjoying his lavish lifestyle. There is a reason why he is called the king of good times. I’ll not go into this kind of patronizing criticism. It’s their money. Let them do what they want to with it.


Is Waiver A Favour?

Ashok Gulati, an authority on Agriculture in India, has been talking about the farmer-consumer binary for a long time now. His argument is somewhat like this:

Beginning with the famine of 1966-67, policymakers focused exclusively on ensuring an adequate and cheap supply of food-grains. This was a laudable objective. But the economic burden of this moral responsibility was transferred to the farmer. Government policies were designed to keep crop prices down, causing havoc to the farmers’ economy. Over the last five decades, farmers have subsidised the national economy to the tune of hundreds of crores.

Yogendra Yadav

The government, in its effort to keep the inflation in check, has been keeping the farm prices down. Everybody eats. An increase in food price affects everyone. In order to please this larger share of voters, the government didn’t let the farm prices go too high. The wage increase for farmers has stagnated while the expenditure keeps rising.

All over India farmers have been on street on & off for the last few years due to agrarian distress. | Image Source: India Today

When the rain is normal & the crop is fine, the excessive supply brings down the prices. When the rain is abnormal, the farmer can’t earn enough to cover his costs.

Pooja Mehra, writing for the Hindu, says:

Our farm policy is so bad, the proverb ‘you reap what you sow’ isn’t true any longer. A bumper crop is no different from a drought, for it too depresses farm incomes.

So, we aren’t doing the farmers a very big favour when a part of our tax money goes into waiving these loans.

But Whom Does It Really Help?

In India, farmers with less than 2 hectares of land are categorized as small & marginal farmers. Only 15% of them have access to institutional credit— they can take a loan from banks. We need not have worried if they constituted a small number but they, in fact, form the bulk of all farmers in India. They borrow from local moneylenders & relatives & the burden on them to payback stays the same even if the government waives the loans. Small & Marginal farmers account for nearly 85% of all farmers.

Even after assuming that all farmers with larger holding have access to formal credit, not more than 28% of all farmers benefit from the loan waivers. Those whose loans are waived are mostly the richer & more prosperous farmers.

Now, if the loan waivers do not really help small farmers, do they at least not hurt them? A case can be made that the farm loan waivers actually hurt small farmers. Last week, there was an excellent piece in EPW which argued that loan waivers affect small farmers in three ways:

  1. They lower their access to formal credit.
  2. They lead to falling in agricultural revenue due to higher informal loan cost.
  3. They lead to falling agricultural productivity.

You can read the mentioned commentary here: Are Loan Waivers a Panacea for Rural Distress?

The Moral Hazard

Ever thought why a government employee does not take his work as seriously as a private employee does? Why the tenured professors put less effort than those who are working on a contract basis? Why people with theft insurance on their vehicles are less worried about their bikes?

That’s the moral hazard for you. All of the people mentioned above have a negative incentive to carry out their work properly. The government employee & the tenured professor are better off being indifferent than actually working well. There is no risk of losing their job. Similarly, the vehicle owner has less incentive to look after his car or bike. If it gets stolen, he will be paid. There have been cases where homeowners have burnt their own houses to claim insurance.

Similarly, Farm loan waiver encourages moral hazard. As politicians are making loan waiver a regular affair, farmers expect their loans to be waived even if they are in a position to pay them. Farmers who have paid back their loans before the loan waivers were announced are upset. Do you think they’ll pay too easily the next time?

This creates a bad credit culture where the banks are unwilling to grant loans to farmers easily. This impacts the project of financial inclusion because most of these loans are in rural areas. If a bank registers more losses in rural areas, it will be less willing to cater to customers in those areas. There have been loan waivers where only the defaulters were given a waiver. Those farmers who had been paying the interests were not given a waiver. This creates a negative incentive to pay back the loan. So, farmers do not even start paying interest even when they can— to stay in the “defaults” category.

Fiscally Imprudent

When Yogi Adityanath waived the loans of more than a million farmers, the waiver amounted to 61% of the state’s fiscal deficit. This means that the state had very less money left to spend on any other productive project like irrigation or infrastructure. Seeing how the States are carelessly announcing loan waivers to win political brownie points, RBI tightened the norms for valuing the debt of the States this July. Initially, the debts were valued at 0.25% over the relevant government security. Now, they are valued as per the market prices. This is increasingly straining their balance sheets & contributing to a higher fiscal deficit.


So, It’s complicated. Loan waivers should be one time measures— like the bailout to big banks after the Global Financial Crisis. This too is a bailout for the people who aren’t in a position to pay back. But thinking that it can solve the problems of agriculture is utter stupidity. Farmers are in need of a loan waiver, there’s no denying that fact. But if the politicians start thinking that their responsibility towards farmers ends with a loan waiver, we are creating a very bad political culture. The agriculture in India is facing a crisis & every month you read the news of an agrarian protest in one part of the country or the other.

There is a need to fix the APMCs. Infrastructure for the cold storage of easily perishable food needs to be created. There are tens of such reforms that can be carried out like Telangana’s Rythu Bandhu scheme or Orissa’s KALIA, which has been applauded for presenting a market-based alternative.

Politicians of all shades are to blame. The issue of loan waiver should not be looked at as black & white, where we can clearly say that they are good & bad. But weaponizing the loan waivers to win elections is a dangerous phenomenon.

I wish to end this post with these beautiful words from a wise Pakistani lady:

Yeh Saare Milkar humko pagaal bana rahe hai.

These people are making a fool out of us.

Kadyalwar Sunil Abhinav

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