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How Farm Loan Waiver Affect Us at a Large Scale

How Farm Loan Waiver Affect Us at a Large Scale



India is an agrarian country, with 50 percent of its working population being employed in agriculture and the gross domestic product (GDP) of the sector corresponding up to 18 percent of the economy. And hence, agriculture is often described as the backbone of the Indian economy. The massive employment in the field of agriculture has led India to be world’s largest producer of certain commodities such as pulses, rice, wheat, spices and spice products. However regardless of this august fact, the sector holds more significance in the current scenario as there also lays a hidden prize for the politicians here. The sector employing two third of the working class is an important vote bank. And “Farm loan waiver” is the device; the politicians have come up with, to please the farmers.

One might wander about what farm loan waiver actually is and how did its trend start in the country. Technically, Farm loans are either crop loans or investment loans taken to buy equipment. Both farmers and banks earn a good profit when all goes as planned. But, when there is an unforeseen happening such as a poor monsoon or natural calamity, or anything that is detrimental to the expected reaps, the farmers become unable to repay loans. The distress and torment in such situations often prompts States or the Centre to offer relief which is the reduction or complete waiver of farm loans. The first ever nation-wide farm loan waiver in India was announced in 1990 by Janata Party government led by then Prime Minister V.P. Singh and cost the government Rs 10,000 crore.[1] Then on November 29, 2011 the UPA ( United Progressive Alliance ) government led by Prime Minister Man Mohan Singh provided Loan waiver to farmers was by the Central Government under Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS), 2008, which amounted to Rs 52,419 crore. The government had to waive 1.3 per cent of GDP of the year to provide the relief. After that the country witnessed a lot of waiver proposals across the state amounting crores of rupees.

Recently in its reports the RBI (Reserve Bank of India) said that even though the farm loans waivers might marginally increase the investment and productivity in the agriculture sector there is no benefit in the overall economy due to the same. And also its annual report on the state finances, RBI also says that Farm productivity enhancement through pecuniary incentives like debt waivers is unproven and hence, higher fiscal deficits in future may not be offset by higher GDP gains.[2] The total debt waiver granted during Financial Year 2018 amounted to 0.32% of India’s GDP as per revised estimates. It stood at 0.27% of GDP in the budget estimates. Total debt waivers are budgeted at 0.2% of GDP in Financial Year 2019. According to Financial Year 2019 budget estimates, states have allocated around 0.1% to 0.8% of the respective state’s domestic product to loan waiver, which ranges between 2.0% to 2.98% of their budgeted gross fiscal deficit.[3]This is alarming with respect to the current political scenario of the state and the upcoming elections. The RBI annual report on state finances in July had already cautioned the states on the propensity of the waiver of loans as they were increasing the fiscal deficits of the states, as there was an increase in the percentage of fiscal deficit to a value around 0.27 percent to 0.32 percent from 0.05 percent of last year.

Even though incidentally the banks provide a write off on the loan amount it is only temporary and ultimately the loss is borne by the States. And if the states keep with the loan waiver the fiscal deficit will keep on increasing causing an overall depression in the economy. Also with farm loan waiver it is the Good money of the tax payer’s that is being spent on gruesome amounts to write off the farmer’s liabilities whereas it can be effectively used in many other sectors for its development. And hence it is important for the state to device an effective mechanism to tackle the situation. The need to find an alternative for the current system of farm loan waiver is not only because of the increasing fiscal deficits in states, it is also for the well being of the farmers. Regardless of the popular story supported by those who strongly oppose the practice of farm loan waiver that the perpetual farm loan waiver by government might provide farmers a ground of ease and may gradually make them lazy to transform into a huge bunch of chronic defaulters who eats off tax payers money, there is more to this. It for the future to say how much of this turns true. But presently, the major issue faced by the farmers due the magnitude of farm loan waivers initiated is the inability to beget farm loans itself. Banks become wary of the propensity of the write-offs that the formalities and procedures for one to beget a farm is hardened and hence, the farmers are forced to take money from informal financial sources such as money lenders at exorbitant interest rates. [4]


One way in which the states can handle the situation is by following Kerala’s format, i.e establishing a debt relief commission. It is a seven-member team of farmers, legal experts, farm economists, political appointees and others who goes from village to village, speaks to farmers, screens their loan portfolios and decides on their quantum of relief. However,The relief provided by the commission is not unconditional: the loan should be from the cooperative sector, which provides the bulk of farm loans; the applicant should be a small or marginal farmer, who owns or has taken on lease a crop area of less than five acres; and the applicant’s annual income should not be over ₹ 2 lakh.[5] But, the farmer suicide rate has fallen to impressively. Other mechanism, can be a once in a lifetime debt waiving by a commission assessing the nature and causes of the default which would effectively help to choose out the chronic defaulters and provide the relief to the needy. Another mechanism can be by giving an extension of time and employing the farmers in any of the governmental organizations or institutions where they work part time until they have paid off the debts through the salary the get by doing this.

Tackling problems as deep-rooted as the farm crisis requires a firmer resolve from the ruling class.[6] If not, the sector which now stands as the backbone f the Indian economy might become the cause of its downfall.





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