Rather than farm loan waivers, an insurance mechanism against crop losses is the way to go.
On the face of it, the Comptroller and Auditor General of India’s (CAG) report on the Centre’s farm debt waiver scheme, launched barely a year before the 2009 general elections, doesn’t make for a pretty picture. It has pointed out to several lapses in its implementation on the ground. The national auditor’s findings, based on a countrywide sample of farmers’ bank accounts, have revealed that 8.5 per cent of the beneficiaries weren’t eligible for waiver, either in full or up to a quarter of the unpaid/overdue amounts on loans disbursed till March 31, 2007. In all these cases, the waiver/relief was given not on direct agricultural loans, but on borrowings for non-farming activity. The CAG report has also highlighted cases — 13.5 per cent of the total sample — where farmers, even when eligible, couldn’t benefit from the scheme.
The above errors, both of inclusion and exclusion, add up to 20 per cent or so. While by no means small, it still implies about three-fourths of eligible farmers benefiting. And when seen against the overall numbers — of Rs 52,000 crore waivers relating to almost 3.5 crore, mostly small or marginal, farmers — the scheme per se cannot be termed a failure. The real issue lies elsewhere; and that is to do with questioning the very need for schemes of debt waiver/relief, based on the large-heartedness of governments especially ahead of elections. Farmers, after all, are exposed to risks emanating from not just crop prices or the market, but also the vagaries of weather. It goes without saying, then, that loans to them have to be treated differently, incorporating restructuring or relief provisions beyond those extended to other producers and economic agents. The way to do it, however, is not by granting waivers linked to political calculations, but through insurance mechanisms that trigger automatic payouts against revenue losses caused by yield or price declines relative to benchmarks specific to each crop or region.
The CAG report, in a sense, serves a timely reminder of the need for an effective crop insurance system in India. The absence of it is what makes farmers dependent on the benevolence of politicians to restore their lost creditworthiness, arising from events largely beyond anybody’s control. Insurance should be made mandatory for all crop loans. True, the wheat farmer in Punjab may not require it as much as the cotton grower in Vidarbha, and, to that extent, the former’s premium would pay for the more recurrent droughts and pest attacks affecting the latter’s crop. But then, this holds even for auto insurance, which is compulsory for all vehicles, irrespective of who drives them. The premium collected from a large number of customers is what makes the insurance business viable, thereby rendering political handouts unnecessary.