Farm Loan Waivers are the Wrong Solution

Bad economics often makes good political sense. Our farmers need systemic reform, not empty waivers.

One subject that becomes topical every election season is farm loan waivers. It has been no different this year. Yesterday, Yogi Adityanath acted out on the BJP’s election promise in Uttar Pradesh by waiving farm loans to the order of ₹36,359 crore. This will benefit around 94 lakh small farmers in the state, out of a total of 2.3 crore farmers in the state. This is a substantial number. Farmers in Indian can move elections.

BJP was not the only party who promised to waive farmers’ loans. The Bahujan Samaj Party made comparable promises, and in the Punjab elections, the Shiromani Akali Dal and the Aam Aadmi Party joined in. But while there is an electoral logic to such promises, they make no economic sense. As Arundhati Bhattacharya, the chief of State Bank of India, said recently:

Credit discipline breaks when you waive off farm loans. Money will come in today because government will pay but when we will give loan in future, farmers will wait for next elections. Support to the farmers is necessary but not at the cost of credit discipline.

This is also known as a moral hazard. Unsurprisingly, a Congress leader found her remarks “insulting to farmers, elected representatives and the House.”

The government in India has always used public sectors banks as an instrument to distribute largesse. Our political landscape abounds with schemes such as the Jan Dhan Yojana, Pradhan Mantri Bima Yojana, Pradhan Mantri Suraksha Yojana and Atal Pension Yojana that form cumbersome roadblocks for the smooth operation and profitability of banks. The PJ Nayak committee set up for reviewing governance of boards of banks in India, highlighted the plight of such bankers when it recommended:

The Government should also cease to issue instructions to public sector banks in pursuit of development objectives. Any such instructions should, after consultation with RBI, be issued by that regulator and be applicable to all banks.

What is sad about this situation is that farmers don’t really benefit from farm loan waivers in the long run. What they really need is for the government to stop intervening in agriculture. Sharad Joshi, a true champion of the cause of farmers, and the leader of the Shetkari Sanghatana, once wrote:

The reality of the loan waiving state is thus, the credit offered by this state to the farmer is in principle illegal and immoral. The reason lies in the fact that one contracting party (the state) imposes roadblocks into the performance and prosperity of the other contracting party (the farmer) making it impossible to pay back the loan, making such a contract void. It is not the farmer that owes the government rather the government owes the farmer by acting as the malefactor with its economically unsound policies towards the farmer.

No wonder, then, that farm loan waivers of more than ₹102.6 billion over the years have failed to make any impact. The solutions to the problems that ail Indian agriculture, instead, lie in removing controls and restoring property rights for the 263 million farmers of India.

Farming in India is one of the most heavily regulated industries. No other industry in India has such exacting and exploitative price controls as agriculture. There are controls and continual interventions at every level of activity. Let’s start with farm inputs: the government provides fertilizer subsidy, irrigation subsidy, power subsidy, seed subsidy and credit subsidy, among many others. Each budget year sees the infusion of a new subsidy meant for the agricultural sector. Such doles lead to a distortion in price signalling and an overproduction of crops.

An artificially increased supply is a disadvantage to both the consumers and the farmers. The market prices that the crops fetch go down. The more the subsidies, the more drastic the fall in prices. Consumers also suffer because the prices of other farm commodities increases as farmers switch to producing the crops subsidised by the government.

The government then intervenes at another level by artificially procuring the produce at artificially high prices. Much of this procurement rots away in storage; or withour storage, as the case may be. An RTI inquiry revealed that the Food Corporation of India had wasted more than 1, 94,502 metric tonnes between the year 2005 and 2013.

The largest subsidies given out are for electricity and fertilizers. The subsidies on electricity are the reason behind power shortages forcing farmers to agitate against blackouts. There is an unfair cross-subsidisation in effect, wherein industrial and commercial setups end up paying more than three to four times the usual tariffs. When offered the alternative to choose between a non-subsidised electricity grid and the shortage-prone subsidised grid, farmers actually choose to unburden themselves from such distortions, as in the case of Gujarat and Tamil Nadu.

Price control is another distortion that hurts farmers. Prices carry information that helps consumers and producers alike in making decisions. The multiple price controls in force prevent farmers from knowing the real impacts of their decisions. An over-reliance on price supports further on, curbs innovation. The support prices offered to the farmers are in fact a hindrance.

To talk about the controls on agricultural land is to open a can of worms. There are levels after levels of controls on agricultural land. The twisted land ceiling laws, restriction on sale of agricultural land for non-agricultural purposes and restrictions on renting of agricultural land have reduced farmers to serfs.

Property Rights is a huge issue. India ranks at a dismal 112 of the 159 countries ranked on the indicator of Legal Systems & Property Rights by the Fraser Institute, faring only marginally better than the war-torn Syria and communist Venezuela. Property rights can be singled out as an institution disadvantaged due to the politics devoted to it. Land distribution, via the power of eminent domain, is the tool that the government invokes to further its political capital. Where the state gains, the poor lose.

Why is it that markets such as telecom and aviation have been set free from a dependency on the state for services and subsidies, while the agricultural markets are still in the bounds of the state? Think about the impact of this differential treatment on all these sectors.

India has only marginally progressed from becoming the least economically free country in the world, but the freedom that exists is not for the poor, but for the relatively well-off.  The inequality in India is not of wealth alone, but also of the amount of restraint and control the government exercises over the poor compared to the well-to-do. Raghuram Rajan in his book Fault Lines points out:

Politicians do not have an incentive to press for systemic reform, for that would eliminate a key function they provide. They would prefer the government continue to be indifferent to the general public while being responsive to the politicians, so that they can offer patronage.

The government in India is the reason why our farmers are suffering so much. Farm loan waivers do nothing to alleviate that pain.

About the author

Saurabh Modi

Saurabh is trained in economics and is a student of law at Government Law College, Mumbai. He is an admirer of the blues and jazz music forms, shares his birthday with Ella Fitzgerald and can be found glued to his kindle at all times he is trying to avoid human contact.