Farm loan waiver has again hit the headlines with recently elected chief ministers approving the scheme. The mainstream media, economists from all strata and also the RBI through its various reports seem to be severely critical of such moves which spoil the credit culture and lead to \u2018crowding out\u2019. So, are the farm loan waivers really that bad? And does it really lead to so called \u2018moral hazard\u2019? Here is an attempt to look at the issue purely from an economic perspective without getting into the political aspects.\u00a0First thing first – As per the RBI report on state government finances, amount spent in loan waiver since 2014 is Rs 1.27 lakh crore. During the same period, banks have made provisions of close to Rs 4 lakh crore due to nonpayment of dues. Almost 90% of this is towards corporate loan accounts. This was not just a loss for the banks; central government had to infuse that much extra fund into these banks for recapitalization. This means corporate loan write-offs have caused more \u2018crowding out\u2019 than the loan waiver.<\/p>\n
Second – Loans are waived only for small and marginal farmers with maximum outstanding loans being in the range of Rs 1-1.5 lakh only. In case of UP, the amount fixed was Rs 1 lakh only whereas in Andhra Pradesh, it was Rs 50,000 with loan between Rs 50,000 and Rs 1.5 lakh being waived over a period of five years. Average amount waived for each farmer in case of UP is Rs 56,000 only. This contrasts with corporate loan write-off where it is even as high as Rs 50,000 crore, enough to meet the needs of one crore farmers! (Lanco Infratech had outstanding principal amount of over Rs 44,000 crore when insolvency court directed liquidation of the company).<\/p>\n
Third – Loans being waived are only short term crop loan similar to working capital loan given to the industries. The waiver helps reduce the distress caused due to sharp drop in farm productivity and help the marginal farmer get loan to grow crop in the next season. If the loans are not waived, it may lead to even lower production, food scarcity and inflation in the subsequent years. Dr Pronab Sen, former chairman of Indian Statistical Commission, says in an article, \u201cIt is not just an ethical issue. It has economic consequence\u201d.<\/p>\n
Loan waiver is often cited as undermining an honest credit culture, impact credit discipline and blunt incentives to repay. However, a default rate of 8% for agriculture loan against as high as 22% for corporate loan doesn\u2019t lend credence to that logic. In a damming rebuttal to this view, Dr Sen says, \u201cDifferent aspects of this ominous view have been picked up by different interlocutors to create a new, frightening urban legend\u201d.<\/p>\n
Clearly urban India has not understood the dynamics of rural economy which still supports over half the country\u2019s population. It is even more important to understand this, since an average rural folk survives with an income nearly one-sixth that of urban India. Transfer of wealth in the form of Rs 50,000 per farmer carries more value for them than the write-off of Rs 50,000 crore of corporate loans.<\/p>\n
This is not to say that loan waiver is a panacea for the ills facing rural economy. Bringing rural economy on par with the urban India, or anywhere close to it, is a challenge that the nation has been grappling with since independence. In the absence of any breakthrough, \u201cfarm loan waivers need to be viewed less ideologically and with more compassion\u201d, to quote Dr Sen.<\/p>\n","protected":false},"excerpt":{"rendered":"
Farm loan waiver has again hit the headlines with recently elected chief ministers approving the scheme. The mainstream media, economists from all strata and also the RBI through its various reports seem to be severely critical of such moves which spoil the credit culture and lead to \u2018crowding out\u2019. So, are the farm loan waivers […]<\/p>\n","protected":false},"author":8,"featured_media":14402,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[857],"tags":[],"class_list":["post-10532","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economy","membership-content","access-restricted"],"yoast_head":"\n