Loan waivers – A debt for the future?

With so much media coverage about the agricultural crisis in Maharashtra and the widespread protests relating to the same, all eyes were on the Maharashtra government to see what actions they would take.

A couple of months back, the Chief Minister of Maharashtra stated his stance against loan waivers. At the time, he held the view that such practices are contrary to the government’s long term objective of increasing farmer’s self-reliance and their future repaying ability. However, he then sanctioned loan waivers of a whopping INR 34.000 crores, in one of the biggest waivers ever granted by any state.

With this sudden U-turn, one can’t help but wonder if the decision was politically driven and was made with utter disregard towards the interests of the economy as a whole. It must be understood that even though a loan waiver brings relief, this relief is temporary. As long as the government continues to allocate funds towards short-sighted relief in the form of loans, rather than a long term solution this loop of lending, borrowing and defaulting will continue. The farmers can breathe freely for now, but the rise of the same situation again is inevitable.

 The only way of getting Indian farmers out of this vicious circle would be investments in the form of infrastructural and irrigational reforms which would contribute towards improving the agricultural sector in its entirety. At present, the Government is merely providing short-lived respite at the cost of the future and is ignoring the long term interests of the economy, which should always take the front seat.

The immediate shortcomings

It must also be considered that this step affects the attitude of the farmers and spreads complacency amongst them. It gives them the belief that even if they fail to get a good harvest, the government will come to their rescue. It punishes those who have made timely payments by not incentivizing good work and rather, putting the compliant and the defaulter on an equal pedestal.

It is also relevant to highlight that announcing crop loan waiver in one state, influences other states to consider doing the same. In fact, it is widely speculated that the Maharashtra government itself succumbed to political pressure. The UP government announced a similar relief scheme just a couple of months back and it is likely that the Maharashtra government, itself, felt obligated to deliver on false expectations created by their counterpart in UP.

Even in the wider scope of things, this decision seems extremely impractical and an exploitation of the tax-payer’s money. Most banking professionals have already condemned the waiver and have been critical of the government for having such a short-sighted approach. The RBI governor, Urjit Patel has been vocal about his opinions and has stated that this decision would negatively affect the credit discipline of our country in addition to hampering the fiscal deficit of the state leading to extreme hardships in managing the operational fund requirement.

Since it’s a State decision, the centre will not come to their rescue and provide them funds. Moreover, the Maharashtra government does not even have the option of introducing new taxes to finance the waiver due to the onset of the GST regime. Hence, with no additional revenue, it is obvious that this waiver will burn a hole in the pockets of the state government leading to shortage of funds for the other industries too, consequently, affecting the GDP severely.

To be fair, it is relevant to note that the farmers indeed were in great peril and some relief measure had to be taken to as a response to their desperate cries. However, more than just tackling the issue year-after-year, it is essential to find a one-time solution for the same.

What can be done to prevent such a situation from arising again?

Well, for starters, the Government must out rightly covey that this was only a one-time grant and won’t be resorted to under any circumstance ever again. They must clarify that such a default won’t be condoned in the future to get rid of the sense of over-dependency on the government which the decision must have created.

Additionally, there are some major problems with our agricultural sector which are required to be addressed with immediate effect. The dependence of farmers on traders for fetching a price for their produce is an extremely undesirable way for things to work in the industry. The farmers are exploited by the traders who take up most of the profit share arising from the sale. Even during a bad harvest, the traders keep their margins intact, but it is the farmer who suffers. The dependence is so much that if for some reason the traders refuse to buy the harvest, lack of market connectivity leaves the farmers with no option but to throw away their produce. Hence, a major corrective measure is required to minimize (if not eliminate) the role of these traders in the agricultural system.

Risk management is another practice which may positively impact farmers and will certainly contribute towards reducing the need for such waivers.

Schemes like crop insurance which have already been implemented may prove to be a vital addition in the agricultural sector. However, some modifications are required since they are still skewed towards protecting banks that provide agricultural loans than the farmers.

To conclude, it’s not wrong to state that loan waivers successfully save the day, but at the cost of a secure future.

 

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