The trend of farm loan waivers has gripped the country and Karnataka is the latest to jump on to the bandwagon.

The fiscal strain of farm loan waivers on the States is worrisome.

As per RBI, the gross fiscal deficit (GFD) of States rose to 3.1 per cent of GDP in 2017-18, breaching the threshold of 3 per cent GFD/GSDP ratio recommended by the Finance Commission. This threshold has been acknowledged by States in their respective Fiscal Responsibility and Budget Management (FRBM) Acts.

Farm debt waivers announced by five large States could widen the fiscal deficit of the States by ₹1,07,700 crore this fiscal. It could, however, be argued that loan waivers are no different from bad loans, and NPAs have been large in other sectors too.

One could cite RBI data on Non-Performing Assets (NPAs) showing that as on December 31, 2017, the industrial sector accounted for 20.41 per cent of the gross NPAs of scheduled commercial banks, whilst the agriculture sector accounted for a modest 6.53 per cent.

The political argument in favour of loan waiver would be that if corporate loans can be written off, why not the toiling hard-working farmer? Can the farm debt waivers then be justified?

Write-off or waive-off?

However, the above argument and logic does not hold water. Firstly, a ‘write-off’ of bad loans in the industrial sector is different from ‘waive-off’ of farm loans − write-off is a technical cleansing of the balance sheet and loan recovery continues, while loan waiver frees the borrower completely from liability to pay and becomes a direct burden on State finances. Nonetheless, both are detrimental to the fiscal balance in the medium run. In any case, two wrongs don’t make a right.

Second, farm-loan waivers do little to resolve the agriculture crisis, albeit a small section of farmers getting a temporary escape, the concomitant after-effects of loan waivers affects the sector and the economy. Several independent reports found farmers turning deliberate defaulters in the hope that their loans will be waived sooner or later. Various banks reported heightened bad loans in the kharif loan recovery season of November-December 2017 post the slew of farm-loan waivers.

Third, with waivers becoming a pre/post-poll expectation among farmers, they end up making the formal system wary of extending credit.

Losing on other benefits

Fourth: farmers, defaulting in anticipation of waivers, lose out on other benefits too. For instance, accounts of many farmers anticipating waivers were sub-standard at the time of enrolment under the farm insurance scheme (PMFBY) and, thus, the compulsory coverage was not extended to them.

At the macro level, waivers lead to crowding-out of private investment as increase in government borrowings to fund waivers tends to increase cost of borrowing for private borrowers. Thus, higher fiscal deficits may not be offset by higher GDP gains and may eventually stoke inflation. In any case, a limited section of farmers get relief from waivers.

To reduce farmers’ debt, two methods could be applied. The first will be an interest subvention scheme that reduces debt but doesn’t destroy the credit repayment behaviour.

Viable alternatives

Alternatively, waiving only a portion of the loan instead of placing a cap on the quantum of loan waiver will be an improvement towards averting moral hazards.

Widening of weather-based crop insurance schemes could be a quicker method of alleviating farmer distress. Use of weather data for providing immediate interim relief should be made mandatory under the crop insurance scheme.

To take care of market and price risks, State governments need to look at less distortionary schemes like price deficit financing or the Rythu Bandhu scheme to stabilise farmer incomes and provide immediate relief. Such an income-based agenda will achieve the twin objectives of doubling farmers’ income and achieving stable sustainable growth.

The writer is MD & CEO of the National Collateral Management Services Limited. Views are personal

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