The Hindu Business Line : Farm loan waiver: An ill-conceived package

While the damage caused by the ill-conceived loan waiver scheme cannot be undone now, the government should immediately initiate measures to rejuvenate agriculture.

S. D. Naik

The substantial expansion of farm waiver package by the UPA Government from Rs 60,314 crore announced in the Budget to Rs 71,680 crore reflects its growing loss of nerve with approaching elections. This announcement has come closely on the heels of bringing political pressure on the State Bank of India to withdraw its internal circular to branches to temporarily suspend new loans to tractors and power tilling equipment segment following mounting non-performing assets (NPAs ) in the segment.

The loan waiver scheme has now been enlarged to include plantations and horticulture, allied agricultural activities such as dairy and poultry farming, as well as investment credit for purchase of tractors and bullocks, deepening of wells etc. Moreover, as recommended by Mr Rahul Gandhi, the scheme will now include bigger farmers with more than five acres of land in dryland areas.

The Government has decided to create a Farmers’ Debt Relief Fund, with an initial corpus of Rs 10,000 crore. The Finance Minister has also stated that Rs 40,000 crore (instead of Rs 25,000 crore) will be provided this year towards the debt waiver scheme. The future installments will be in subsequent Budgets until 2011-12.

ILL-CONCEIVED

Clearly, the massive loan waiver scheme is ill-conceived from several angles. For one, it will impose a huge additional fiscal burden at a time when global crude prices have gone through the roof and the Centre will have to provide for hefty increases in salaries of its employees under the Sixth Pay Commission award.

Moreover, with the National Rural Employment Guarantee Scheme (NREGS) having now been extended to al the 600 districts of the country, the Centre will have to provide more funds for the scheme. Second, it is grossly iniquitous in that it leaves out nearly two-thirds of the farmers who have borrowed from private moneylenders.

Moreover, it will make the farmers who repaid their loans in time, feel betrayed and affect the carefully nurtured credit culture. Already, many banks are finding their farm sector NPAs rising because of non-repayment of loans.

Third, it is a one-time benefit to only a small section of farmers who borrowed from institutional sources and is no substitute for the substantially higher investments needed in agriculture and rural infrastructure on a sustained basis.

Even after the announcement of the expanded package, an overwhelming majority of affected farmers feel left out and new demands and suggestions have been coming from different States every day. In fact, the State government has now announced its own package to include some of the left-out farmers. Thus, as the Magasasay award winning journalist, Mr P. Sainath has aptly put it: “The UPA Government’s waiver is no solution to even the immediate crisis, let alone long-term agrarian problems.”

PRAGMATIC ALTERNATIVE

A pragmatic alternative for the Government would have been to implement some of the recommendations made by the Radhakrishna Committee on Rural Indebtedness. The Committee had suggested several remedial measures to tackle the serious problem of rural indebtedness. However, loan waiver did not find a place in its report.

After noting that more than half of the farm households do not borrow from institutional sources and that they pay usurious rates of interest on borrowings from moneylenders, the Committee wanted the banks to grant a one-time term loan to such farmers to free them from the clutches of moneylenders. It had also mooted a Moneylenders’ Redemption Fund with an initial corpus of Rs 100 crore to operationalise the scheme.

Some of the other pragmatic suggestions of the Committee included the rescheduling of loans, making available fresh loans and waiving of interest liability of borrowers for the extended period of up to two years (both for short and long-term loans).

The financial burden of this was to be equally shared between the Central and State governments. More important, the Committee had suggested that those who repaid their dues promptly must be rewarded.

Thus, rescheduling of loans could have been for a much longer period of three-five years, interest waivers, making available fresh loans on government guarantee, and finding some way to provide the much-needed relief to those indebted to moneylenders on the lines suggested by the Radhakrishna Committee, would have been a much better alternative.

WAY FORWARD

While the damage caused by the ill-conceived loan waiver scheme cannot be undone now, the government should immediately initiate both short and long-term measures to rejuvenate agriculture. And, as the Expert Group on Agricultural Indebtedness has suggested, rejuvenation of the farm sector lies in addressing basic structural, institutional and technological factors as also the restructuring of public support systems.

First and foremost, there is an urgent need to reverse the long-term declining trend in public investment in agriculture since 1980-81. There has been a sharp decline in the share of public sector gross capital formation (GCF) to 17.23 per cent in 1999-2000 from 43.2 per cent in 1980-81. Contrary to expectations, private investment failed to compensate for the drastic decline in public sector investment in the sector.

To overcome the resource constraint, funds allocated under ‘Bharat Nirman’ and National Rural Employment Guarantee Scheme could be used to boost the asset base of the farm sector.

Serious efforts are needed to ensure that not only the institutional credit to the sector increases significantly, but that it reaches more number of farmers, particularly the small and marginal farmers. Though farm credit has shown a robust growth over the past few years, the number of farmers covered has not increased proportionately.

In this context, the suggestion of the Expert Group to make Micro-Finance Institutions (MFIs) an integral part of mainstream banking deserves consideration.

The banks should be asked to provide resource support to MFIs on the condition that they moderate their interest rates and abide by ethical banking practices. This will immensely benefit the vast majority of small and marginal farmers who have no access to banking institutions at present.

The other areas requiring urgent attention are the strengthening of Research and Extension Services and risk mitigation measures such as crop insurance, weather insurance, price risk mitigation and expanding the livelihood opportunities for the rural population outside the farm sector.

Far-reaching changes are also needed in the land use pattern, water management, reclamation of waste-land and selection of crops to suit the environmental needs. Organic farming also needs a closer look to make agriculture sustainable.

Related Stories:
Loan waiver gets bigger with inclusion of ‘other’ farmers
Mechanics of farm loan waiver
PM defends farm loan waiver
Achieving Sisyphean proportions
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