POLITICS AND ECONOMICS OF FARM LOAN WAIVER: The Global ANALYST
Politics and Economics of
Farm Loan Waiver*
M G Warrier, Ex-GM, RBI
Uttar
Pradesh state government’s announcement of farm loan waiver amounting to Rs
36,359 crore last month has given another dimension to the already messy
environment in which India’s banking sector had landed in recent years due to
rising stressed assets across sectors. The genuine fear of bankers is that the
UP waiver will be followed with similar announcements by other states,
vitiating the credit environment in rural India.
During the Reserve Bank of India’s
customary media interaction that followed the first Bi-monthly Monetary Policy
Announcement during the Financial Year 2017-18 on Thursday, April 6, 2017, RBI Governor
expressed displeasure over the current spate of farm
loan waivers by state governments and said these adversely affect the culture
of repayments as well as put a severe burden on the exchequer.
When asked, “What do you think are
the implications of the farm loan waiver schemes and is it a cause of concern
for the RBI?” Dr. Urjit R. Patel
responded thus: “There are several
conceptual issues, if one were to put one’s hat as an economist on. I think it
undermines an honest credit culture, it impacts credit discipline, it blunts
incentives for future borrowers to repay, in other words, waivers engender
moral hazard. It also entails at the end of the day transfer from tax payers to
borrowers. If on account of this, overall Government borrowing goes up, yields
on Government bonds also are impacted. Thereafter it can also lead to the
crowding out of private borrowers as higher government borrowing can lead to an
increase in cost of borrowing for others. I think we need to create a consensus
such that loan waiver promises are eschewed, otherwise sub-sovereign fiscal
challenges in this context could eventually affect the national balance sheet.”
Dr Urjit Patel was in fact repeating
the consistent stand of the institution he represents. Since the massive waiver of loans in
agricultural and rural credit sectors
under the central government sponsored Agricultural and Rural Debt
Relief Scheme (ARDRS), 1990 under which the responsibility for repayment of
overdue loans in rural areas was shared by central and state governments, RBI
has been pointing out to the central and state governments the implications of such waivers on the credit discipline on which
the business of banking is dependent for survival.
Concerns expressed by RBI Governor
now, echoes the gist of RBI’s consistent stand on loan waivers which was
articulated on several occasions since 1990.
Centre and state governments, on most of the occasions, went ahead with
their political agenda of such waivers which are partly responsible for spread
of the malignancy of financial indiscipline to other sectors.
This time around, RBI has given the
message loud and clear and the reference to ‘national balance-sheets’ should
wake up the authorities responsible for policy formulation and opinion makers
to the reality of the situation. When taxpayers’ money is diverted to purposes
other than those for which taxes are collected and budgeted, governments will
have to borrow to meet the extra burden which will create imbalances in fiscal
management. Many popular schemes like
‘freebies’, tax concessions to corporates, and refusal to bring certain sectors
like agriculture within tax net are already making the budget exercises at
Centre and states level slip out of the accepted contours of financial
discipline.
While RBI advice to move towards a
consensus to eschew politically motivated agricultural loan waivers is timely
and welcome and needs to be taken seriously, simultaneous efforts are necessary
to provide relief to genuine borrowers. Such supports would include providing
crop insurance, ensuring all linkages for getting timely inputs at reasonable
costs, irrigation facilities, cost-related farm gate price, storage and transport facilities for perishable farm
products and so on at reasonable costs.
Long term implications
The measure (waiver) has significant long-term
implications for the economy which include:
(a) Creating a moral hazard among borrowers as it removes any
incentive for repayment. An economy already burdened with the problem of bad
loans can ill afford such a systemic undermining of its credit culture and will
adversely affect RBI’s monetary policy initiatives.
(b) Political situation in India is such
that, if one state government extends a benefit to a category of beneficiaries, irrespective of the need or
affordability, other state governments are forced to either offer similar
benefits or lose political ground.
(c) Such measures adds to government debt that will compel them to borrow more. Rising government debt which will add to the
inflationary pressure and can frustrate RBI’s desperate initiatives to keep
inflation within mandated levels.
Blame on RBI misplaced
The
media and analysts in the recent past had been gossiping that the new RBI
Governor Urjit Patel toes GOI line and in the process RBI’s image has suffered.
Recent months saw even books being
released explaining how the credibility of the central bank is getting affected
over a period of time. Relationship issues between GOI and RBI are getting
magnified in books like “Dialogues of the Deaf” (TCA Srinivasa Raghavan) published recently.
RBI
has taken the criticism unleashed, especially in the context of alleged lapses
in post-Demonetization currency management in its stride. The approach of RBI
to issues and how the central bank is playing its assigned role are being
brought out on an ongoing basis in documents published by RBI. The first
Monetary Policy Statement for the year 2017-18 and the Team RBI’s interaction
with media following the release of the document give enough indication that
RBI’s Think Tank (which now includes eminent members of Monetary Policy
Committee) does its job with professionalism.
A piece of history
As state governments which have
announced ‘waiver’ are unlikely to retreat from their position, let us look
back and think of how best to avoid past mistakes in implementation of such
schemes.
On March 5, 2013, a story in a
mainstream financial daily made the following observations about implementation
of a farm loan waiver scheme (Rs52,000 crore) by the then United Progressive
Alliance government in 2008-09 quoting a report of the Comptroller and Auditor
General(CAG) tabled in Parliament during the first week of March 2013:
(a) The scheme, meant to
help indebted farmers in districts where suicides occur, was so haphazard and
faulty in implementation that no records were maintained of farmers’
applications accepted or rejected by lending institutions or how many farmers
were given fresh loans as a result of debt waiver/relief.
(b) Several ineligible
farmers were favoured and a large number of deserving small and marginal
farmers left out in the implementation of the scheme.
(c) CAG report said that
the monitoring of the scheme was ‘deficient’ and there was even prima facie
evidence of tampering with, overwriting and alteration of records, besides
several other irregularities in implementation of the scheme.
(d) The report observed
that in the absence of monitoring of the scheme, lending institutions did not
issue debt waiver relief certificates to eligible beneficiaries. Such
procedural lapses resulted in achieving the original purpose of implementing
the scheme.
It may be recalled that the
Agricultural Debt Relief Scheme (ADRS) launched in May 2008 targeted to support
3.69 crore small and marginal farmers and 60 lakh other farmers in Maharashtra,
Andhra Pradesh and Kerala(states from which several farmers suicide cases were
reported in that year) to become eligible for fresh loans.
A post mortem report coming after a
lapse of 5 or more crop cycles after implementation of the scheme may not help
the beneficiaries of ADRS, 2008. Still, remembering past experiences may help
in avoiding same or similar lapses while implementing the present scheme.
We have a sound institutional structure
At the highest policy level,
agricultural and rural credit structure is the most well-researched and
supported institutional arrangement in India during the post-independence days,
till the emergence of LPG (Liberalisation-Privatisation-Globalisation) regime
in India, circa 1990. That period saw massive surveys and studies like All
India Rural Credit Survey, All India Rural credit Review, Agricultural Credit
Review Committee and CRAFFICARD to mention a few. There were historic changes
in the institutional structure also, like establishment of State Bank of India,
Agricltural Refinance Corporation, application of Banking Regulation Act to
cooperative banks and setting up of NABARD and Regional Rural banks.
Moving forward
From mid-1980’s, the policy focus
shifted from farming and rural sector which continue to be the foundation and
backbone of Indian Economy to more lucrative commercial sectors. Time is
running out for a reversal of this policy shift. Such a reversal of policy
approach will have to factor in:
(a) A comprehensive farming plan based on
the consumption, industry and export needs of farm produce.
(b) Linkages like electricity, water,
storage and transportation facilities.
(c) Ensuring a pricing and crop insurance
scheme which take care of cost-effective farming and several risks associated
with farming.
(d) At bank level, an appraisal and
monitoring system from disbursement to recovery. Perhaps, the three component
formula of olden days (Cash, Kind and Consumption needs) and “project Approach”
in lending to agriculture may have to be reintroduced with appropriate
modifications with changing needs.
(e) Last, but not the least, subsidy is
not a bad word. Where necessary, funds should be generated from surpluses in
farm income and used for providing need-based subsidy. The present practices of
interest subsidy for prompt payment and ‘free electricity’, ‘free fertilizers’
etc should be eschewed.
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*The Global ANALYST, May 2017. Article finalized on April 20, 2017.
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