Open Forum

New Delhi, 17 April 2008

Farm Loan Waiver

TAKE A CLOSER LOOK

By T.D. Jagadesan

 The escalating price rise and food crisis has put into focus the state of our agriculture yet again. Only a month-and-a-half back an estimated Rs 60,000 crore loan waiver for farmers hogged the headline for days together. The government’s decision was on an unprecedented scale. And this aspect of Finance Minister Chidambaram’s budget speech attracted widespread comment. Almost all political parties welcomed the move as most had been clamouring for such a step to relieve the farmers from debt.

However, the Government still does not spell out the basis of the estimate nor of the institutions, loan categories, and class of borrowers that will be covered by the scheme. Thus, several aspects need to be clarified. Firstly, by definition, the scheme can apply only to those who have outstanding loans with institutions. Nearly three-fourths of all rural households and 60 per cent of farm households report that they do not have any outstanding debt. All households with outstanding debt may not have outstanding institutional debt. Thus, the large majority of farmers will not benefit from the waiver. If only farmer loans are eligible, the proportion of beneficiaries will be even smaller.

Secondly, both access to institutional credit and the proportion of outstanding debt, are skewed in favour of larger farms. Cultivator households with less than two hectares account for 85 per cent of all farm households, and report a lower incidence of debt (46 per cent) and of outstanding debt (30 per cent) than the overall average.

Thirdly, institutional loans include direct lending (to meet needs production as well as consumption) and “indirect lending” for allied activities (such as input distribution, trading, transport and processing of farm produce). The latter comprise about half of outstanding loans of cooperative; 55 per cent in regional rural banks; and a little under half in scheduled commercial banks. There is hardly any justification for waivers on indirect loans.

Fourthly, the magnitude of outstanding debt of rural households, going by the National Sample Survey (NSS) data, is less than outstanding debt reported by the institutions in the cooperatives and substantially so in regional rural banks. Since both are intended to lend mostly in rural areas, this difference suggests that they also carry a sizeable portfolio of non-household, non-rural loans.

Fifthly, the basis of the estimate that the waiver will cost Rs.60,000 crore is far from clear. There is good reason to believe that a generalized waiver of all over dues will benefit non-rural borrowers to a considerable extent, that the large majority of rural households, including those in the below two hectares category will not benefit; and that the magnitude of benefit accruing to them will be considerably less than the said amount. Benefits in rural areas will accrue to a rather small fraction of households and the magnitude of relief to beneficiaries is to be considerably less than the cited figure.

These considerations argue for a close second look at the rationale, scope and intent of the scheme. But it is also necessary to warn the public of the large adverse effects of waivers on the rural credit system. Supporters of the scheme argue that this one-time-relief is a necessary measure to address the current agrarian crisis and that it would enable farmers to restart on a clean slate. But this has been said every time in the past when such waivers were announced.

Experience shows that waivers encouraged borrowers to presume that they can sooner or later get away without repaying loans. It reinforces the culture of willful default, which has resulted in huge over dues and defaults in all segments of organized financial institutions. The deterioration in the cooperative credit system is, in large measure, due to the conscious state policy of interference in the grant and recovery of loan.

Cooperatives have by far the greatest reach in terms of accessibility, number of borrowers, and delivery of credit to the rural population. Concerned by their near collapse, the Central government set up a task force to suggest ways to arrest the trend and revive them. The task force suggested radical changes in the legal and institutional framework essential to enable and induce cooperatives to function as autonomous and self-regulating entities. It emphasized the need to eliminate government interference in grant of loans, recovery process, and waiving of dues from borrowers. The Central Government accepted the recommendations.

Extensive consultations with States led to a political consensus to accept and implement the reform package. The Central Government has committed to provide around Rs.18,000 crore to clear accumulated losses over a period of time and linked to actual fulfillment of specified conditions.

Most States have since given their formal commitment to this effect and agreed to abide by the conditions for availing of Central financial assistance. Supervised implementation is under way and has made significant progress in several States. This programme thus already covers a significant part of what is being attempted in the current waiver scheme.

It is ironical that the decision to go for a general waiver comes even as the above reform programme is under way. It obviously goes against the Central thrust and spirit of the reform programme. Since the proposed general waiver is wholly underwritten and funded by the Centre, the need for the kind of restructuring and conditionally attached to central assistance is likely to be questioned. Doubts will be raised and pressures will build to dilute or even to override the programme.

It is very important that the Centre clarifies its position on the status of the current reform programme and how such pressures can be contained so that apprehensions about the project of much-needed institution reform in cooperative credit institutions are to be allayed.

Loan waivers are at best temporary palliatives to the problems facing rural India. Significant and sustained improvement in the welfare of the rural population is not possible without a faster pace of growth in the rural economy and an improved quality of education and health services. Increased public spending will not achieve this.

It is essential to address deeper problems rooted in the over-exploitation and degradation of land and water, government policies that encourage wasteful use of resources, the inefficiency of public systems responsible for implementing programmes, regulating the use of common service facilities, and ensuring quality infrastructural and support services. ---INFA

(Copyright, India News and Feature Alliance)