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Why farm loan waiver is a bad idea
Business Standard
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February 25, 2008

The reported move by the government, to prepare for a virtually across-the-board waiver of bad or rescheduled agricultural loans, is imprudent in every way.

Most importantly, it may end up crippling the agricultural credit system, which is what happened once earlier with the then deputy prime minister, Devi Lal's, loan waiver of 1990.

The cooperative credit sector has still not fully recovered from that blow. Apart from turning cooperative credit banks sick, it made even the commercial banking sector wary of disbursing crop loans for a long time after that ill-conceived move.

The step that is reportedly being planned now will destroy the discipline of any functioning credit system, and jeopardise the repayment of other loans even in the future as those who have been servicing their loans will wonder what wrong they have done that their loans are not being written off.

Worse, the scheme may end up compounding, rather than alleviating, the woes of defaulters and heavily indebted farmers, by making them eligible for fresh credit despite their being unable to earn enough to repay their existing loans.

Finally, the move does not address the bigger issue of farmers' indebtedness to moneylenders, who charge usurious interest rates.

The need for providing relief to farmers in distress cannot be disputed. But if it is offered in a manner that is tantamount to killing the goose (i.e. farm credit) that lays the golden eggs, then it surely is unwise. Leave alone the farm loan waiver scheme of 1990, even in more recent times the futility of measures like interest waiver and loan repayment rescheduling has been manifest in Vidarbha and other areas affected by farmers' suicides.

The relief measures announced, it is obvious, did not have the desired effect as reports of suicides have continued to pour in unabated from these belts even after the implementation of the debt relief package.

This is largely because private moneylenders, who supplement the loans of even those farmers who are covered under the institutional credit system, have continued to harass them for the settlement of their dues. What farmers need for their survival is income, and not so much debt relief; in other words, the country needs agricultural renewal and productivity improvement.

The government's reported move may also defy macro-level fiscal prudence. Considering the huge volume of total non-performing assets related to agriculture, the funds needed for such a measure would be in excess of Rs 32,000 crore (Rs 320 billion).

If the rescheduled farm loans are also taken into the reckoning, this figure might touch a mind-boggling Rs 90,000 crore (Rs 900 billion). Doling out such mammoth sums would, obviously, adversely affect the availability of funds for other pressing developmental needs. As it is, the government is subventing 2 per cent of interest on crop loans of up to Rs 2 lakh (Rs 200,000) disbursed by the banks at 7 per cent interest, instead of the usual 9 per cent.

Taking all these into consideration, the government needs to rethink its proposal and consider, instead, a relief package for distressed farmers without endangering agricultural credit.

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