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.
*The Global ANALYST, May 2017. Article finalized on April 20, 2017.


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