Loan-Waiver Schemes Got 99 Problems. And Implementation is One


Loan-Waiver Schemes Got 99 Problems. And Implementation is One

Illustration: Sushant Ahire


etween yesterday and today, thousands of farmers – men, women, senior citizens – who had gathered in Mumbai, returned to their villages. Hopefully, they did not have to walk back the entire 180 kilometres. They left us amazed with the grace and dignity with which they drew attention to their problems, refusing to upend life for the rest of us. They have now left the ball squarely in the court of the government. Their main demand is an unconditional loan waiver, or in simple words – “loan maaf kar do”.

Waivers are par for the course in our country. We give them more often than Duterte hands out the death penalty. In the last year alone, Uttar Pradesh announced a debt waiver of ₹36,400 crore, Punjab of ₹10,000 crores, Karnataka of ₹8,165 crores and Rajasthan of ₹8,000 crores. Maharashtra, currently in the eye of the storm, had announced a debt waiver of ₹30,500 crores just last July.


It is easy to see just how far loan waivers have solved the problems of our farmers, the most disenfranchised of Indians. The protests across the country are a result of our systemic failure to address concerns in the agriculture sector, pushing farmers to a corner. Organised protests are one way of registering their distress, an attempt to stake a claim to their basic rights of existence and dignity. On the extreme end, of course, the only solution left to them is suicide.

As one state granted waivers, protests erupted in other states, hoping to reap similar benefits. As state after state goes to polls, the demand for farm-loan waivers tends to get louder. With the fear of paying for it with a political defeat, governments have caved in.

But what makes good political sense, rarely makes for good moral and economic sense.

When we’re ill, we listen to medical opinion by doctors because they’re specialists in the field. When it comes to economics, we need to pay attention to what the experts have to say. “The culture of loan waivers must end,” said former RBI Governor and media darling, Raghuram Rajan in 2014. It was a sentiment that was later echoed by his successor Urjit Patel last year. Even the World Bank commented on the issue in January earlier this year, claiming, “Debt waiver is not a good way of supporting farmers.”

These recommendations, however, seem to have fallen on deaf ears.

It’s the fashion of the times to negate any achievements of the previous government, but at least we can learn from their failures. Not only did a loan-waiver scheme implemented by the Manmohan Singh government in 2008 fail in its long-term objectives, it did not even provide short-term relief to farmers. It only marginally affected the number of suicides. The reason is simple: Loan-waiver schemes suffer from 99 problems and implementation is one.

There is difficulty in identifying the beneficiaries and distributing the amount. Seldom do the benefits of a debt waiver reach the right people at the right time, in the right manner. According to the 2008 Comptroller and Auditor General report, many eligible accounts weren’t considered. In other cases, beneficiaries who were not eligible were granted waivers. There are also fundamental question marks over coverage, how many people actually qualify, and can benefit from these schemes.

And then there is the problem that loan waivers only look at institutional credit – but the government is easy to deal with, private loan sharks are not. According to the 2012-13 NSS-SAS report, about 39 per cent indebted households acquired credit from non-institutional sources like moneylenders who charge exorbitant rates, which are outside the purview of debt-waiver schemes. Loans are taken from multiple sources, they are taken for multiple reasons, including non-farm activities.

But those are only the surface problems, the issues with loan waivers are much deeper.

Loan waivers create moral hazards; they discredit farmers who were able to repay their loans fairly on time. It’s a little like telling students after an exam that they could have copied and passed. It is unfair on the students who worked hard and attempted it fairly. Secondly, whenever loan-waiver schemes have been announced in the past, we’ve seen rich farmers default on repayment despite being in a financially viable position to do so.

What we fail to grasp is that when a loan is waived, it is not erased from the face of the Earth. It’s just that the burden of repaying the money shifts from the farmers to state governments. And with the time it it takes the government to pay back the principal loan amounts, the burden shifts to the bank. See what’s happening here? The good old game of relay.

Loan waivers are a short-term remedy, and – unpopular opinion alert – a quick-fix with the aim of political gain rather than an attempt to fix deeper structural problems that engulf the agriculture sector.

For a system that’s already struggling with huge NPAs, stressed assets, and a certain Nirav Modi, this only makes things worse. When banks don’t get back their money on time, not only does it affect their capacity to lend money to others and fund various large-scale projects, they become selective in their lending of money to the agriculture sector in the future, knowing it’s a possible red flag. If I know that lending money to someone could result in a potential loss, I might just do away with it and save myself the headache. It affects the overall long-term credit culture of the banking system.

As money goes out from state budgets to pay these loans, it goes from a kitty that was supposed to fund some other project. As dads told us, “Money doesn’t grow on trees,” and a sum that was allocated to fund a highway, college, or hospital will now be used to waive off loans, crippling infrastructure demands of the state.

Again, all of this trouble would be completely acceptable if the waiver did indeed solve the problem forever. It would be acceptable even if at least improved conditions for farmers so there are no more suicides. But is that really happening?

The government is only able to waive off the farmers’ current loans instead of empowering them to be able to pay their future loans. What happens if we face the same problem again next year? Another drought? What if farmers borrow and default again? Will there be another protest? Another loan waiver?

Loan waivers are a short-term remedy, and – unpopular opinion alert – a quick-fix with the aim of political gain rather than an attempt to fix deeper structural problems that engulf the agriculture sector. Instead of waiving off their debts and sending the economy into a spiral, it is infinitely better to ensure farmers become capable of repaying the loans themselves. When this happens, farmers do well, and the economy does well. Instead of adopting this paternalistic attitude, we need to push for their self-sufficiency and profit. It is a goal towards which all efforts need to be made.

The tougher but more tenable solution to this is to strive toward increasing agricultural income. It includes attempting to tackle long-term and difficult problems related to supply chain, trade cartels, land reforms, modernised farming, irrigation, wastage, crop productivity, insurance, and warehousing among others. In his Union Budget speech, Finance Minister Arun Jaitley announced a remuneration price 1.5 times higher than MSP, which turned out to be an empty promise on closer examination.

We have known these problems for a long time. We have also known the solutions to them for a long time as well.

My guess however, is that loan waivers will continue to be the story. The problem with these structural long-term reforms is, they don’t help you win the immediate election. The effects will be seen in a decade from now, when a government may or may not be in power.  

Loan waivers have been carried out by the Congress, by the BJP. The only thing they help in solving, is the problem of voting a party to power and soothing a protest. But these short-term fixes will never be able to solve the acute agrarian crisis we are staring in the face right now. To really bail out the folks who put the food on our plates, will require a more humane rethink.