The sweeping wave of loan waivers has generated serious debates across the country on their economics and likely outcomes. Till date 12 States have announced loan waiver amounting to more than ₹2 lakh crore.

Loan waiver cannot be a solution to address the agrarian crisis, instead the government must look for long-term solutions. There is also the danger of intense competition among the political parties to win by promising the farm loan waiver and projecting themselves as the protectors of farmers becoming the norm of the day before each election.

India has a long history of loan waivers. In 1990, the then Prime Minister announced an agricultural debt relief scheme totalling to ₹10,000 crore for agricultural borrowers. In the same year, a similar scheme was announced by then Chief Minister of Haryana, waiving ₹227.5 crore of farm loans by banks and cooperatives.

Over the next decade despite the RBI’s warning of the adverse consequences of such measures, several States resorted to them. In 2008, the UPA government announced one of the largest debt waiver schemes in history. The Agricultural Debt Waiver and Debt Relief Scheme waived ₹60,000 crore spread across 237 districts and reaching 30 million farmers. Over the next few years the programme received widespread criticism from economists.

However, this did not stop governments at the State level from making further loan waiver announcements and now more than 10 States have joined the club.

If loan waiver was the solution to agrarian distress, why hasn’t it prevented farm incomes from decelerating and farmers from committing suicide?

Ample evidence and research confirm that loan waiver has not increased agricultural productivity and in fact resulted in an increase in moral hazard among the eligible households. The CAG report following the 2008 loan waiver clearly brought out rampant corruption and exclusion and inclusion errors in identification of beneficiaries. We try to dwell upon this expensive scheme and its desirability from the economic, social and farmers’ welfare perspectives.

Benefits for a few

As per the latest data available from Nabard All-India Rural Financial Inclusion Survey 2016-17, only 26 per cent of rural households in Chhattisgarh, 35 per cent in Madhya Pradesh and 31 per cent in Rajasthan availed themselves of loans from any source during 2015-16.

The percentage of institutional borrowers were close to 16, 21 and 19 per cent respectively in Chhattisgarh, Madhya Pradesh and Rajasthan. One can see that the waiving off loans benefits only about one-fifth of agricultural households and create disincentives for those who use their own resources or are unable to avail themselves of institutional loans.

Apart from benefiting only institutional borrowers, loan waivers would be a heavy drain on the financial resources of both the States and the Centre which may adversely affect public investments in agriculture and irrigation and dissuade private investments.

This has been the case at the central level with agricultural investments declining in real terms in the last few years. Several studies have shown that facilitating access to institutional credit can increase farmers’ income by 15-20 per cent, which will be instrumental in improving their living standards. The amount foregone on waiving loans could give better returns if invested in agricultural research and development, markets, irrigation or even by enhancing the penetration of institutional credit.

Moreover, frequent loan waivers, which are often politically motivated, erode the rural credit delivery system. This results in deceleration in the flow of agricultural credit and perpetual tendency of non-repayment of loans among the borrowers.

Credit, be it from formal or informal sources, plays an indispensable role in the lives of agricultural households. Efforts should be made towards financial inclusion of agricultural households, particularly of marginal and small farmers.

Till date, about 56 per cent of marginal and 48 per cent of small farmers (less than 2 ha) are outside the ambit of rural credit market. And they will continue to face distress despite State governments’ decisions to dole out their citizens’ hard-earned money to be in power.

The government should devise other options to address agrarian issues rather than resorting to economically irrational, inefficient and socially inequitable instrument like loan waiver.

Kumar is with International Food Policy Research Institute and Bathla is with Jawaharlal University, New Delhi. Views expressed are personal.