• EconAfterHours

Can waivers really wave it away?

Updated: Mar 11, 2020

By Sonakshi Grover

Our country with the largest land area under cultivation of wheat, rice, and cereal in the world, 3/4th of its population dependent on rural income and having 70 percent of its poor population living in rural areas mostly involved in agriculture, has 54 percent of its agricultural land, unirrigated and dependent on the erratic south-west monsoons.

India’s growth in improving agricultural infrastructure has been dismal. Almost every three years droughts or bumper crops reduce incomes drastically for farmers. The policy of loan waiver used to provide immediate relief to farmers has cast a shadow on the pursuance of tangible reforms that minimize the way uncertainties affect agricultural produce and income.

Loan waivers make political parties seem benevolent and are a great selling point for distressed farmers. Historically, every party has won after promising such waivers. With the sudden surge in such promises, an economic analysis is essential.

Farmers in India are dependent on current income alone. Loss of crop a season means they have no means of subsistence whatsoever. As farming is often intergenerational, it is ironical why farmers involved in a profession of uncertainty have hardly any wealth to back themselves. For wealth, they need savings which depend on ability depending on income levels, and willingness influenced by incentives. While the government tries to ensure the former through MSP, it is the latter that waivers impact more.

Waivers adversely impact the incentive to save. Credit discipline in society is essential to encourage a culture of not defaulting loans. Waivers create relatively easier opt-outs, that have over the years hit hard on the adherence to bank terms and making farmers realize the magnanimity of defaulting loans. This has, in turn, resulted in a lapse in seriousness on the decisions to save. At the same time, borrowers giving up current consumption and timely repaying loans can also get disincentivized from doing the same seeing an easier opt out.

Banks take time to recover from these NPAs. They often respond by refusing loans to defaulted farmers creating a vicious cycle where they’ll always depend on waivers or move to exploitative money lenders. General loan policies also get tighter adversely affecting repaying farmers also. Less farmer friendly policies, in turn, distort incentives again.

A culture of waivers is harmful to economic development. States finance these waivers by either borrowing or increasing taxes. In either case the overall supply of funds deposited and available for investment declines in the economy, crowding out private investment crucial for growth. This wouldn’t happen if an increase in government expenditure also increase savings. The incentive structure of waivers, however, doesn’t push for an increase in savings and therefore investment goes down.

Providing farmers with avenues to earn nonagricultural income through cattle breeding, poultry and employment in government schools, post offices in off seasons will start to give them some backbone support. Replacing waivers, with re-giving them subsidized/free HYV seeds, fertilizers post a drought enables them to work and earn without adversely impacting the need to save.

Improving farmers’ productivity should be the center of agricultural reform. This requires an improvement in drip irrigation, rainwater harvesting, better weather forecasting and drainage management. This also requires ensuring them adequate health, nutrition, and education through public policy initiatives that will enable them to employ themselves in alternative fields as well. Equal endowments of these necessities will provide them better avenues to earn, save and improve overall productivity and welfare. The current policy initiatives of crop insurance should provide small and marginal farmers adequate subsidies on premiums to cover the risks affecting the worst-off.

Loan waivers will always act as a hurdle in way of these reforms; they will give an illusion of relief to farmers, and a selling point to governments who wouldn’t be incentivized to do anymore. It’s, however, a practice that will be hard to eradicate instantaneously without damage. It should hence be gradually phased put by States, with prioritization to reforms that affect the structural problems, to enable our farmers and our agriculture to flourish.

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