Harmful waivers

The Chief Minister of residual Andhra Pradesh N Chandrababu Naidu may have bought time in implementing his lavish pre-poll promise of waiving ₹54,000 crore worth of farm loans. The decision to appoint an expert committee to recommend guidelines on the waiver may well be a ploy to defer — even soften — the impact of his rash populism. But the worst aspect of such political opportunism is that rather than helping farmers, it will eventually only cut off their access to formal lending institutions. Giving that agriculture involves a huge gamble on the weather — a bumper crop ready for harvest can be ravaged overnight by an unseasonal storm — there is a case for adopting a sympathetic approach towards loans given to farmers. Surely, at the very least, in an environment in which corporate debts — aggregating some ₹2,50,000 crore — can be ‘restructured’, there is no case for denying farmers similar relief in the event of financial difficulties due to factors beyond their control.

But there is a difference between an institutionalised mechanism for the restructuring of debt and outright waivers which are a result of pre-poll promises by self-serving politicians. This kind of populism, by fostering a culture of non-repayment, will only make bankers hesitant to lend. When even those who can afford to repay decide not to — in the expectation of the next government writing off these using taxpayer money — the biggest sufferer is the honest borrower. The latter is now denied a fresh crop loan by the bank and, therefore, forced to go to the village moneylender or the mandi commission agent. A scheme designed to ‘buy’ votes, thus, becomes a tool to leave farmers at the mercy of the informal credit market.

Farmers can very well do without the large-heartedness of governments if the country has in place a robust crop insurance system. Such insurance should be made mandatory for all crop loans. The sum insured must be equal to at least the loan amount so as to act as collateral for the bank to extend fresh credit for the next season. Such a system should also trigger automatic payouts to farmers against any yield losses or price declines relative to thresholds, based on reasonable averages for each crop and region. The new agriculture minister Radha Mohan Singh has talked of launching an agricultural income insurance scheme. Under this, the Centre would offer insurance based on the average income of farmers over the last 5 to 7 years, while also subsidising the premiums payable. A subsidy on crop insurance is certainly preferable to that on fertilisers or electricity, which promotes inefficient resource use. And an effective crop insurance mechanism will also make political handouts such as loan waivers redundant and unnecessary.

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