Forgetting loan waivers, States must look at insurance, pricing mechanism

Rising incidence of loan waivers is indicative of the fact that agricultural credit is being used as more of a political instrument rather than as a means to alleviate farm distress.

For a country facing larger weather vagaries, one off compensation scheme like loan waivers is a highly unsustainable solution to farm distress and detrimental to the economy’s resources. The mid-year economic survey has warned against these waivers and estimated that if all States start offering them, the total burden could swell to ₹2.7 lakh crore.

With several States facing elections in the coming few months, more States are likely to follow the league of Maharashtra, Uttar Pradesh, Tamil Nadu and Punjab.

Economists, bankers and independent analysts have strongly argued that writing off farm loans would worsen the credit indiscipline amongst farmers while draining the State exchequers. Apart from breeding the problem of moral hazard amongst farmers, loan waivers impact the lending patterns of the banks as they become selective in their credit extension.

In the past, banks have shown a tendency to downsize credit operations in districts with frequent loan waivers. All such waivers — be it in 1990, 2008 or possibly 2017 too — were followed by the farming community suffering credit crunch because of banks’ apprehensions of loan recovery in the next season. This, in turn, has impacted agricultural activities of that region and gives way to informal lending at usurious rates.

Loan waivers also lead to crowding-out of private borrowers as high government borrowing tend to impose an increasing cost of borrowing for others. The RBI has also rung a warning bell on large farm waivers causing inflationary spill overs. Additionally, indebtedness is widely a problem more of small and marginal farmers. Waivers, on the other hand, often fail to make a distinction between those who need it and those who do not, and this inflates their burden as well as the fiscal deficit of the States.

What, then, are the viable solutions for alleviating farmer distress?

That the farm sector is facing stress cannot be denied. Solutions also need to have more than an element of “political” acceptance and consensus among a large majority of stakeholders. Clearly, the long-term solution needs to focus on agricultural risk mitigation, augmenting net farm incomes, improving productivity and a stable price regime.

What can governments do when they face farmer agitations?

There, clearly, is no magic wand. However, the following set of measures will provide quick relief in situations of genuine farm distress caused due to loss of crop or sharp fall in prices. The current crop insurance scheme, Pradhan Mantri Fasal Bima Yojana, can be quickly made more comprehensive and efficient through a well-designed, farmer-friendly, weather-based crop insurance scheme. Weather data is now available on account of the large number of automatic weather stations set up across the country.

Weather-based insurance schemes are more cost-effective and can provide immediate relief as against a crop-based scheme as crop yields take a long time to assess.

While a few States have an interest subvention scheme, interest rates at the banks are at around 8-9 per cent which are high for the farm community. An across the board interest subvention scheme of subsidising interest rates by 2-3 per cent is more sustainable than the ad hoc loan waivers.

There are more cases of farm distress due to sharp fall in prices rather than due to loss of crop.

A stable and well-designed export-import policy for farm produce along with allowing greater freedom to the private sector can help build a stable domestic price regime without creating a large fiscal burden unlike an ad-hoc and poorly implemented minimum support price regime.

Through a well-designed incentives and duties framework, private entities can engage in procurement from farmers under a set of conditions to stabilise prices. India’s agriculture exports will also help boost farmer incomes.

In addition, governments need to look beyond the agricultural incomes of the farm community. China has increased its rural income through a lot of non-farm subsidiary activities.

More autonomy to credible private seed companies can also lead to quicker adoption of high yielding varieties to boost productivity.

Thus, a shift in approach of State governments from ad-hoc pay outs to sustainable and sound policies for stabilising farm incomes and prices that can provide quick relief is the need of the hour.

The writer is MD & CEO, National Collateral Management Services Ltd. Views are personal.

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