Will Farmer Loan Waiver Help?

On the face of it, it should be seen as a bold move. It is easily the singlelargest loan-waiver--"estimated at Rs.50,000 crore and the OTS relief on the overdue loans is estimated at Rs.10,000crore"-- ever in the history of India. And perhaps nobody--not even themost hard-hearted of market-economists--would dispute that something needed tobe done urgently for the distressing situation of the debt-entrapped farmers,for whom this loan-waiver has ostensibly been announced.

Predictably, most economists and the establishment-wallahs are divided. Butthere is no such confusion in the minds of the Congress party members. Most find it difficult tohide their glee. For they think the FM has delivered a political master-strokewhich they perceive to be a sure-shot electoral trump-card.

However, not everyone is so gung-ho. The FM himself was frank enough to admit, at the very outset,that thecommittee appointed under Dr. R. Radhakrishna to examine all aspects of agriculturalindebtedness, while making a number of recommendations, had "stopped short of recommending waiver of agriculturalloans".

But the FM has boldly gone ahead and positioned himself and his party as "sensitive to the difficulties of the farming community, especially the small and marginal farmers".For it is easy to play Political Robinhood, for you know that the proposals justcan not be opposed by any political party. The farmers are as big a constituency asthe one for "quotas" and reservations --and we all know how all the political partiesreacted once the proposals had been announced. The FM, when pressed at the press conference later,said so much by pointing out that thosewho are opposed to the proposal should stand up and be counted.

Predictably, nobody has. Even the BJP, and other opposition members, havebeen content to say that this is too little, too late, or that the government isbeing politically expedient. Even the government's allies, the Left among them,find themselves in abind. For theywould not want to be seen as anti-farmer and yet they would know that the Congress couldstand to gain at their expense particularly in Kerala, West-Bengal and Tripura.

But before we come to what is wrong with the proposals, let's first take alook at what they are. The following is the relevant extract from the FM'sspeech on Debt Waiver and Debt Relief:

(i) All agricultural loans disbursed by scheduled commercial banks, regional rural banks and cooperative credit institutions up to March 31, 2007 and overdue as on December 31, 2007 will be covered under the scheme.

(ii) For marginal farmers (i.e., holding upto 1 hectare) and small farmers (1-2 hectare), there will be a complete waiver of all loans that were overdue on December 31, 2007 and which remained unpaid until February 29, 2008. In respect of other farmers, there will be a one time settlement (OTS) scheme for all loans that were overdue on December 31, 2007 and which remained unpaid until February 29, 2008. Under the OTS, a rebate of 25 per cent will be given against payment of the balance of 75 per cent.

(iii) Agricultural loans were restructured and rescheduled by banks in 2004 and 2006 through special packages. These rescheduled loans, and other loans rescheduled in the normal course as per RBI guidelines, will also be eligible either for a waiver or an OTS on the same pattern.

(iv) The implementation of the debt waiver and debt relief scheme will be completed by June 30, 2008. Upon being granted debt waiver or signing an agreement for debt relief under the OTS, the farmer would be entitled to fresh agricultural loans from the banks in accordance with normal rules.

(v) Government estimates that about three crore small and marginal farmers and about one crore other farmers will benefit from the scheme. The total value of overdue loans being waived is estimated at Rs.50,000 crore and the OTS relief on the overdue loans is estimated at Rs.10,000 crore.

In an answer to a question, at his post-budget press-conference, when askedpointedly how the budget seeks to help those farmers who, instead of takingloans from a commercial bank, may be indebted to local money lenders, the FM wasunambiguous: "It doesn't". And there-in lies the rub, say those whohave studied the problem of agricultural debt, particularly in those areas whichhave been in the news because of recent cases of suicides and farmers caught ina vicious debt-trap. In addition, some of the following obvious questions tooperhaps need to be answered when we examine the proposed scheme:

• What about the bulk of the small and marginal farmers of dryland areas who typically own more than 2 hectares of land? 
• What about the debt owed to private money-lenders, which is estimated at more than two-thirds of total farm debt (including most of the poor farmers in Vidarbha, and elsewhere, who have been in the news)
• Does the scheme not penalise those farmers who have been regular in paying off their loans to banks?
• Would it not encourage farmers to take such a policy as a given and build this into future behaviour?
• Would that not discourage banks from lending to farmers, if the lendingmechanisms and disciplines can be so easily subverted?
• And will this not in turn lead to further strengthening of the vice-grip ofprivate money-lenders on the farmers?
• How dependent are the farmers on banks anyway?
• Would those who gain necessarily be the likes of those poor farmers who have been in the news for the appalling suicides or are caught in debt-traps?
• Or would such a write-off actually get to be exploited by those who excel in mastering andmilking the system, as evidenced by the recentcontroversy surrounding major film-stars who classified themselves as"farmers" for example.
• How would the scheme be funded?

As a preamble, the FM had said that he had " carefully weighed the pros and cons of debt waiver and... taken into account the resource position", but it remains as yetunclear as to how exactly the government intends to fund the scheme for there isno provision in the budget, nor is there any indication as to what it would doto the fiscal deficit.

On his part, when pressed, the FM said in the press-conference, that heshould be credited with at least sufficient intelligence to have thought throughthe proposal and its after-effects. He said that he was confident of providing" liquidity to the banking system, in a period of three years, equivalent to the amount that has been written off"and that he was taking a three year period into account only because the banksin any case would have budgeted for the money not being recoverable till theloans were due.

There has long been some consensus among experts that what is needed is a total overhaul of the creditmechanisms for small and marginal farmers, and that the distressing figures offarmers' suicides can only be controlled by an overallreview of agricultural practices. But the supporters of the FM's scheme claim that even if it does not act as a panacea to thefarmers' problems, atleast it is one step in the right direction for something needed to be done, and that it had to be done in the very short term,for aren't weall, quoting Keynes, dead in the long run?

Whether or not it benefits all indebted farmers, by specifying June 30 as the date by which these write-offs have to beeffected, the FM has sent out a clear signal that theelections could be announced anytime after the monsoons.Political analysts, though, would point out that elections have already beenannounced. Given the orchestrated celebrations byrounded-up "farmers" outside 10, Janpath beingtelecast on TV channels, one thing is clear: the party clearly has budgeted for an electoralwindfall.