Agricultural Loan Waiver- A Study of Causes and Consequences

 

 

ABSTRACT:

This article is written on the background of recent strike by farmers in Maharashtra from 1^st June 2017. We examined the arguments in favour and against loan waivers to farmers taking into consideration the major issues. We understand that there are various reasons for low profitability of Indian agricultural sector- unfavourable terms of trade, too much dependence on weather conditions, lack of access to technology, non-availability of large acres of land for modernization of agricultural methods etc. Although, agriculture is a priority sector for India, it cannot be made dependent on Government for smooth functioning. Loan waiver is a temporary solution and unlikely to lead to sustained development of the sector. We have also suggested some long term solutions here.

 

 

INTRODUCTION:

This article is written on the background of recent strike by farmers in Maharashtra from 1^st June 2017. Possibility of such agitations spreading to other states cannot be ruled out.

Refer Photographs 1.

 

Phtograph 1

 

Source: The Financial Express (New Delhi) dated 2^nd June, 2017

 

Sources of agricultural credit can be classified into institutional and non-institutional. Prior to 1950-51, the influence of local moneylenders was much higher than institutional lenders. Later, various types of institutional sources emerged- Co-operative credit societies, Land Development Banks, Commercial Banks and Regional Rural Banks.

The share of co-operative credit societies has steadily increased from a meager 3% in 1950-51 to 39% in 1999-00. Land Development Banks provide long term loans to farmers for 15 to 20 years against the mortgage of their lands. One of the main objectives of nationalization of 14 commercial banks in June 1969, was to ensure smooth flow of credit to agriculture. In 1975, the Government set up a network of regional rural banks to cater to the specific needs of weaker sections of rural community.

 

After 1950-51, due to above developments, share of money lenders in agricultural credit has come down to a meager 20%.

 

Farmers often take loans for agricultural purposes but when the conditions become unfavourable, they are unable to pay their debt.

 

The rural distress in such situations prompts the farmers to agitate for loan waivers to the Government. Then, the Government has to take the responsibility of repaying the loan to the banks

 

Farm loans are sometimes used as a political tool. In 1990, Prime Minister V.P. Singh’s Government announced a debt relief scheme of up to Rs. 10,000 for each borrower. In 2008, the UPA Government proposed a farm loan waiver scheme in the year’s budget. It announced a full waiver of dues up to 31^st March 2007 and overdue as on 31^st December, 2007 for marginal and small farmers and one time relief of 25% rebate to other farmers. State Governments like Haryana, Tamil Nadu, Telangana and Andhra Pradesh have also on certain occasions granted loan waivers.

 

But how beneficial exactly is the loan waiver for agricultural sector?

Let us look at both sides of the issue.

 

Arguments in favour of farm loan waiver:

Agriculture plays a vital role in employment generation in Indian economy. As per National Sample Survey Office (NSSO), the share of agriculture in total employment was 48.9% in 2011-12. In 2015-16, agriculture contributed 17.4% to India’s GDP^[1]. This crucial sector is however, faced with a number of issues. To name a few, let us consider the following:

 

1. Dependence on monsoon:

Indian agriculture is primarily dependent on monsoon. Almost 53% of its gross cropped area is rain fed and even that area which is irrigated gets affected when the rainfall is low. Only about 35-40% area is under assured irrigation. This sector is highly dependent on monsoon which is highly unpredictable^[2]. Refer Graph 1 and Table 1.

 

Graph 1: Rainfall (in mm) from 1950-2013

Source: Based on data from All India Area Weighted Monthly Seasonal and Annual Rainfall on www.data.gov.in (Open Government Data Platform India)^[3].

 

An average farmer would first anticipate the monsoon. Based on this, he would buy his requirements for the year’s crop, generally, with the credit taken. If the monsoon does not turn out to be as expected, the crop fails and loan cannot be repaid. This can lead to agitations demanding a loan waiver.

              

2. Reduction in farm size and productivity:

Between 1970-71 and 2005-06, the total number of operational holdings in India increased from 71.01 million to 128.89 million and operational holdings area declined from 162.18 million to 156.62 million ha. This resulted in the reduction of average farm size from 2.28 ha to 1.21 ha. Studies have found adverse relationship between farm size and productivity. While small farms in India are superior in terms of production performance, it is weak in terms of generating adequate income and sustaining livelihood. Tiny holdings below 0.8 ha do not generate enough income to keep a farm family out of poverty despite high productivity ^[4].

 

To add to this, the burden of loans on a small farmer leads to further poverty generation. Whatever little income is earned goes in repaying the loans. Hence, in times of adversity, loan waiver seems to be an appropriate option to support the small farmer in fighting poverty albeit temporarily.

 

1. Considerable share of middlemen in margin of produce:

As per a study conducted in Ahmedabad, Chennai and Kolkata markets of selected fruits and vegetables documented in “Marketing of Fruits and Vegetables in India: A Study Covering the Ahmedabad, Chennai and Kolkata Markets”, the percentage share of marketing cost in consumer rupee ranged from 15.5 to 18.28% for vegetables and 5.03 to 17.86% for fruits. Also, the share of farmers in consumer rupee was in the range of 41.11 to 69.32% amongst the selected vegetables and fruits. For most of the commodities, study suggests that the share of farmers hovered around 35 to 45%. The low share of farmers in consumer rupee was more due to high marketing margin rather than marketing cost^[5].

 

2. Post-harvest losses of agricultural produce:

Due to lack of infrastructural facilities of storage of agricultural produce, a substantial amount is lost in post-harvest stages. Poor roads, lack of tractors and trucks and long distances to city markets collectively make it difficult for farmers to extract reasonable prices. In addition, insufficient cold storage and cold chain transportation systems-which are able to extend the shelf life of produce from as little as a few days to weeks or more-are often cited as one of the key reasons for Indian food waste^[6].

 

3. Reducing GDP of agriculture:

The contribution of Agricultural GDP is reducing consistently. Hence, it is imperative to support agriculture. Refer Graph 2.

 

Graph 2: Contribution of various sectors to GDP

Source: Ministry of Statistics and Programme Implementation

Table 1: Frequency of drought over the years

Decade	Frequency of Droughts (years)	Drought Years
1950	1	1951
1960	3	1965-66, 1966-67, and 1968-69
1970	3	1972-73, 1974-75, and 1979-80
1980	3	1982-83, 1986-87,and 1987-88
1990	0	-
2000	3	2002-03, 2004-05 and 2009-10

Source: Monsoon 2013: Estimating the Impact on Agriculture; authors Ashok Gulati, Shweta Saini and Surbhi Jain^[2]

 

DISCUSSION:

India primarily depends on agriculture for employment for majority of its population. Being the most essential sector for the economy of India, it wise for the Government to make an effort although temporary to rescue the farmers from their mounting loans. Along with long term solutions, it becomes imperative to take measures which are short term. Majority of the loans of the farmers are crop loans. These are taken for purchases such as loans for seeds, fertilizers, etc. They tend to be rolling in nature i.e. as soon as one loan is repaid after sale of one season’s crop, the farmer needs to take another loan to buy requirements for next season’s crop. However, when a farmer is unable to repay it due to unfavourable situations, he will not get any further loan to continue agriculture. Hence, the Government has to intervene.

 

Arguments against farm loan waiver:

In 2014, Raguram Rajan, the former RBI governor had questioned the effectiveness of farm loan waivers saying that such programmes had constrained credit flow to farmers. “In some States, on certain occasions, we have had debt waivers. How effective have these debt waivers been? In fact, the studies that we have… show that they have been ineffective. In fact, they have constrained the credit flow, post waiver, to farmers,” he had said at a conference of the Indian Economic Association.

 

1. Fiscal deficit:

As the Government repays loans on behalf of farmers, its expenditure increases. This increases the fiscal deficit. In 2008, the Government disbursed Rs 52,516.86 crore^[7].  RBI said in a report on State Finances 2016-17, "While these loan waivers could alleviate the immediate debt burden of financially distressed farmers, it is essentially a transfer from tax payers to borrowers with an adverse bearing on the fiscal viability of states,".  Refer Table 2(a) and 2(b).

 

For the statistics in the tables, it can be seen how the payments under the scheme led to increase in fiscal deficit from 2.54% in 2007-08 to 5.99% in 2008-09 and 6.46% in 2009-10.

 

Table 2: Impact of debt waivers of 2008 scheme on fiscal deficit in India

 

Table 2(a): Amounts disbursed under the scheme:

Year	Amount (Rs. Crores)
2008-09	25,000
2009-10	15,000
2010-11	11,340.41
2011-12	1,176.39
Total	52,516.86

Source: Credit Policy for Agriculture in India – An Evaluation; Anwarul Hoda and Prerna Terway (Indian Council for Research on International Economic Relations)^[9].

 

Table 2(b): Deficits of Central Government as a percentage of GDP:

Years	Gross Fiscal Deficit
2002-03	5.72
2003-04	4.34
2004-05	3.88
2005-06	3.96
2006-07	3.32
2007-08	2.54
2008-09	5.99
2009-10	6.46
2010-11	4.79
2011-12	5.84
2012-13	4.91
2013-14	4.43
2014-15	4.09

Source: “Fiscal Deficit and its Trends in India” ;authors Sonika Gupta and Prof. Kalpana Singh^[8].

 

2. Impact on credit discipline:

Credit discipline means the intention and ability to repay a loan. Loan waivers have adverse impact on credit discipline of agriculturists. According to State Bank of India Chairman Arundhati Bhattacharya,“ We feel that in case of a farm loan waiver there is always a fall in credit discipline because the people who get the waiver have expectations of future waivers as well. Today the loans will come back as the Government will pay for it but when we disburse loans again then the farmer will wait for the next election expecting another waiver”.

 

According to RBI Governor Urjit Patel, the promises of loan waivers should be “avoided” as they ‘entail transfer of taxpayers' money’. Addressing the media after the first monetary policy announcement of 2017-18, he said "There is a need to create consensus so that loan waiver promises are eschewed. It impacts credit culture and discipline. Farm loan waiver undermines the honest credit culture. It is a moral hazard."

 

The adverse impact on credit culture is evidenced by the growing NPAs of commercial banks in agricultural credit post 2008-2011 i.e. after the period of debt waiver. Refer Table 3.

 

Table 3: Agricultural NPAs of commercial banks

Year	NPAs of Commercial Banks in Agriculture (Rs. Crore)	NPAs as a share (%) of outstanding loans by Commercial Banks
2005-06	6,716	3.48
2006-07	7,367	2.93
2007-08	9,735	3.29
2008-09	7,149	1.95
2009-10	10,353	2.25
2010-11	16,700	3.31
2011-12	24,800	4.23
2012-13	30,200	4.77

Source: Credit Policy for Agriculture in India – An Evaluation; Anwarul Hoda and Prerna Terway (Indian Council for Research on International Economic Relations)^[9].

 

The table shows that the NPAs of commercial banks has increased from 3.31% in 2010-11 to 4.23% in 2011-12 and further to 4.77% in 2012-13. As a matter of fact, the NPA can be seen to be steadily mounting and gone beyond the levels which existed before the debt waiver. Generalized credit discourages prompt payment of loan installments in expectation of further debt waivers from Government^[9].

 

3. Lapses in implementation of schemes:

Due to difficulties in managing the large scale and other functional problems, there are chances that ineligible farmers also benefit from such schemes. This leads to unwanted expenditure for the Consolidated Fund of India. For instance, in the 2008 scheme, out of the total of 80,299 accounts test checked by CAG in Performance Audit, 6,823 accounts amounting to Rs. 20.50 crores were ineligible for loan waiver. This constitutes 8.5% which is significant and it is indicative of the fact that total errors in inclusion of ineligible beneficiaries can be large with correspondingly high monetary value^[7].

 

4. Temporary solution:

Loan waivers is a short term solution of the core problem and objective of supporting agriculture rather than a conclusive solution. When the Government takes responsibility for the current loan burden of the agriculturist, the future loans still have to be repaid by the farmer himself. The core objective is to make farmer self-sufficient. However, by easing their debt burden this manner makes them dependent on Government which aggravates the problem instead of solving it.

 

5. Future credit flows:

When the Government pays loans of farmers, the credit discipline is impacted as mentioned in earlier paragraphs. As a result, bankers tend to be reluctant to give further credit to agriculture. This is due to the fear of non-realization of loans given.

 

This can be seen from the reduction in credit flow to agriculture in the years subsequent to 2008-11 Refer Table 4.

 

In 2011-12, the percentage increase has come down from 22% in 2010-11 to 9% in 2011-12.

 

Table 4: Credit Flow to Agriculture

Year	Amount (Rs. Crores)	% increase
2004-05	125,309	-
2005-06	180,486	44%
2006-07	229,400	27%
2007-08	254,658	11%
2008-09	287,149	13%
2009-10	384,514	34%
2010-11	468,291	22%
2011-12	511,029	9%
2012-13	607,375	19%

Source: Based on Agricultural Credit in India : Status and Problems; authors Dr. Sharmistha Matkar and Mr. Anil Keshav Jadhao^[10]

 

DISCUSSION:

There are various reasons for low profitability of Indian agricultural sector. Unfavourable terms of trade, too much dependence on weather conditions, lack of access to technology, non-availability of large acres of land for modernization of agricultural methods etc. are some of them. Loan waiver is seen as a sign of support of the Government towards agriculture and recognition of the adverse conditions that surround farmers especially the marginal farmers. However, this prompts us to see accumulated debt as a cause rather than as an effect of another issue^[11]. Loan waiver takes the focus of the core problems that need to be tackled.

 

Repayment of loans taken by agriculturists by the Government contradicts the idea of making agricultural sector self-sufficient. For a long time, this sector has received preferential treatment. Giving support to agriculture is in itself a welcome idea. But, offering a loan waiver is not the correct method of achieving the objective. This is a temporary solution and unlikely to lead to sustained development of the sector.

 

Inference:

In the above study, we examined the arguments in favour and against loan waivers to farmers taking into consideration the major issues. We realize that although, agriculture is a priority sector for India, it cannot be made dependent on Government for smooth functioning. The main objective should be to make it self-sustaining and make its product market competitive. Loan waiver sometimes seems to be the only alternative to deal with the current predicament. However, economists have always emphasized that it is a bad economic decision.

 

The solutions to this issue should be more fundamental in nature rather than temporary. Few solutions can be as follows:

 

1. Reducing dependence on agriculture for employment:

Industry and technology are the proven methods of development throughout the world. Programmes like “Make in India”, “ Smart City” etc. are the right steps towards increasing employment in sectors other than agriculture. Farmers have to themselves, take steps to ensure that not all members of their future generations depend on agriculture. The efforts of the Government in supporting industry combined with efforts of farmers in educating their children will make this possible.

 

2. Mechanization of agriculture:

We have seen above that farm size has been reducing in India. This restricts mechanization. Collective farming is one such solution. which farmers can adopt to solve the issue of small farms. This improves productivity by use of modern equipment which is otherwise not feasible in small farms.

 

In the long run, efforts should be taken in solving the core issue i.e. of increasing population pressure on land. The growth of employment is lagging behind the growth of population. Due to this, jobs are not available in industry and service sector, hence, people continue to depend on agriculture. Thus, we believe that the long term solution to most of our problems will be controlling population and spreading high level literacy.

 

REFERENCES:

1.       India Economic Survey 2015-16- Key Highlights dated 26^th February 2016 by KPMG Available on: https://home.kpmg.com /content/dam/kpmg/pdf/2016/04/KPMG-Flash-News-India-Economic-Survey-2015-16%E2%80%93Key-Highlights-3.pdf

2.       Ashok Gulati, Shweta Saini and Surbhi Jain. Working Paper 269- Monsoon 2013: Estimating the Impact on Agriculture. Indian Council For Research on International Economic Relations. December 2013. Available on: http://www. indiaenvironmentportal.org.in/files/file/monsoon%202013.pdf

3.       All India Area Weighted Monthly Seasonal and Annual Rainfall on www.data.gov.in (Open Government Data Platform India).Available on: https://data.gov.in/catalog/area-weighted-monthly-seasonal-and-annual-rainfall-mm-36-meteorological-subdivisions

4.       Ramesh Chand, P A Lakshmi Prasanna and Aruna Singh. Farm Size and Productivity: Understanding the Strengths of Smallholders and Improving Their Livelihoods. Economic & Political Weekly-Review of Agriculture, Volume XLVI Nos. 26 & 27, June 25, 2011. Available on:http://www.ind iaenvironmentportal.org.in/files/file/Farm%20Size.pdf

5.       Vasaht P. Gandhi and N.V. Namboodiri. Marketing of Fruits and Vegetables in India: A Study Covering the Ahemdabad, Chennai and Kolkatta Markets. Publications of IIM- Ahemdabad. July 22, 2010. Available on:http://www.iim ahd.ernet.in/publications/data/2004-06-09vpgandhi.pdf

6.       Paul Artiuch and Samuel Kornstein. Sustainable Approaches to Reducing Food Waste in India. Journal of Massachusetts Institute of Technology. February 10, 2012.Available on:http://web.mit.edu/colab/pdf/papers/Reducing_Food_Waste_India.pdf

7.       Report of CAG on Performance Audit on ‘Implementation of the Agricultural Debt Waiver and Debt Relief Scheme, 2008’.Available on: http://www.cag.gov .in/sites/default/files/ audit_report_files/Union_Performance_Civil_Sector_3_2013.pd

8.       Sonika Gupta and Prof. Kalpana Singh. Fiscal Deficit and its Trends in India. International Journal of Business and Management Invention, Volume 5 Issue 11, November 2016.Available n:http://www.ijbmi. org/papers/Vol (5) 11/H0511063075.pdf

9.       Anwarul Hoda and Prerna Terway. Working Paper 302- Credit Policy for Agriculture in India – An Evaluation: Supporting Indian Farms the Smart Way: Rationalizing Subsidies and Investments for Faster, Inclusive and Sustainable Growth. Indian Council for Research on International Economic Relations. June 2015. Available on:http://icrier. org/pdf/ Working_Paper_302.pdf

10.     Dr. Sharmistha Matkar and Mr. Anil Keshav Jadhao. Agricultural Credit in India: Status and Problems. Research Front, Volume 3, No.2, April-June 2015. Available on:http://www.researchfront.in/16%20APRIL-UNE%2 2015/19. pdf

11.     N.Srinivasan. Farm Loan Waiver: Right Choice for Supporting Agriculture?. Journal of College of Agricultural Banking. April-June2008.Available on:http://cab.org.in/CAB%20Calling%20Content/The%20Sub%20Prime%20Crisis%20-%20An%20Analysis/Farm%20Loan%20Waiver-%20Right%20Choice%20for%20Supporting%20Agriculture.pdf