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To Waive, or Not to Waive Farm Loans


Most of the farmers in the country find themselves in debt for one or the other reason. Frequent crop failures, insufficient income from the crop yields and diversion of agriculture loan are some of the reasons for non-payment of loans by the farmers. Every year, thousands of farmers commit suicide because they are not in a position to pay their debt. Question may be asked in this regard: has the loan waiver the potential of minimizing the agony of the farmers? Is the scheme reaching to those who are in need? Is the scheme truly benefiting them? Is this the only way out? What are the other ways to pull the farmers out of the debt and increase their income?

Reality Check

According to the estimates every year eight to ten thousand farmers commit suicide in India leaving behind scores of orphans and widows. A majority of them are small and farmers. According to the data on farmer suicides compiled by the National Crime Records Bureau (NCRB), over 72% of farmers who commit suicide have less than two hectares of land. The data reveals that less than 2% of farmers who committed suicide in 2015 were large farmers with more than 10 hectares of land.

Small and marginal farmers have very little access to institutional credit. Majority of them take loans from informal or non-institutional sources like local money lenders, traders, friends and relatives or bigger farmers and often mortgage their ornaments and land to them to obtain loan. While waiving the farmers’ loan, generally small and medium farmers are uppermost in the minds of the government. However, loan waiver largely benefits large farms because small farmers have no access to the formal credit system.

Then who are mainly benefitted by the farm loan waiver? Most of the beneficiaries are those who own large tracts of land or have bought the land from small and marginal farmers. In Rajasthan though the land of the farmers belonging to the scheduled castes and scheduled tribes cannot be sold, the reality is that the money lenders use has their power over the land of the indebted farmer.

Hence it is in essential fitness of things that Government should address the issue of small and marginal farmers who are obtaining loans from private lenders. There is a need to make a law that will help the small farmers repay their debt taken from the private money lenders. The law should contain a provision for an effective categorization of farmers. There should be a check on the exorbitant interest rate charged by the private lenders. The farmers must be helped in getting rid of their involvement in vicious circle of compound interest. There is a need to identify the farmers who are indebted to the banks as well as local lenders.

Temporary Solution

Farm loan waiver can at best be a palliative, only providing temporary relief, but does not work in the long run. Economists are generally of the unanimous view that loan waiver does not work whether it is for industry or agriculture. Reserve Bank of India has also its reservations when it comes to repeated loan waivers. Recently the BJP which was elected to the power in Uttar Pradesh securing landslide mandate has announced a loan waiver to the farmers as promised in its poll manifesto. The loan waiver will give relief to nearly 21 million farmers, at an estimated outlay of Rs Rs 36,359 crores, which is 2.6% of UP’s gross state domestic product (GSDP). Added to this the UP government also approved write-off of Rs 5,630 crore of non-performing assets of 7 lakh farmers. However, it is good that the state government will utilise its own resources to waive the loan. If the Centre would have come forward to help the UP government in this regard, it would have triggered a ripple effect across other states of the country. And the consequences would have been bad for the country and the agriculture.

However, this is bad economics. First, the loan waiver is for those who have borrowed from the banks. This will encourage farmers not to repay their loans. Secondly, those who take loan from money lenders and traders are not benefitted by the loan waiver scheme.

Thirdly, since loan waiving is fast becoming a rule rather than an exception due to due to political expediency, the farmers will keep withhold payment and waiting for some type of loan waver scheme that may be announced in the next elections. Consequently, they form a habit of not repaying the loan.

‘What I believe there should not be loan waiver for farmers. They will expect for another waiver scheme next year. It will not help farmers any way. What the government should do is that the interest rates should be reduced. And the farmers should be given more crop loans. If I talk about Gujarat, the crop loan amount should be increased from three to five or ten lakhs. The farmers should be provided water, uninterrupted power and proper market linkage to realize fair price of their produce. I will say that there should be MSP for all crops farmers produce,” said Padma Shri Gena Bhai Patel who is a very successful farmer in Kutch district of Gujarat.

‘I share my own experience. Farmers earn 3 to 4 lakhs from one acre of land. I started pomegranate cultivation in 2004. More than 50000 to 70000 farmers have benefited from it. I always say that farmers should be provided all facilities. So that they can stand on their own,” added Patel.

Affecting State Economy

Indian Ratings, in its report said, “While the solution to the agrarian crisis the country is facing is not an easy one, providing a debt waiver to farmers will only provide short term relief to distressed farmers, but will also lead to a bad credit culture, besides exerting pressure on state finances.”

Farm loan waiver will have adverse implications for the already strained finances of Uttar Pradesh. Its fiscal deficit widened from 2.7 per cent of gross state domestic product (GSDP) in 2013-14 to 3.4 per cent in 2014-15.In 2015- 16, the state’s fiscal deficit almost doubled to 5.85 per cent of GSDP. The fiscal deficit was proposed to be reduced to about four per cent in the last fiscal which seemed unlikely due to the pre-poll pressure to spend more on various schemes and government salaries.

Different states have been waiving the farm loans from time to time. After the loan waiver in Uttar Pradesh, there has been clamour for the similar waiver in different states. Farmers in Maharashtra and Tamil Nadu have demanded loan waiving schemes for them.

Urjit Patel, Governor of Reserve Bank of India has cautioned that farm loan waiver undermines honest credit culture and impairs incentives for borrowers to repay bank loans. Same view has also been expressed by Arundhati Bhattacharya, Chairperson of State Bank of India (SBI).

For Farmers

If corporate loans can be waived off, why can’t farm loans be? Added to this, it is also right that the magnitude of aggregate corporate loans is significantly higher as compared with agrarian loans.

“While the salaries of the government servants and bank managers have been witnessing several fold increase since 1970, the income of farmers are either stagnant or declining (taking inflation into consideration),” said P. Ayyakannu, National South Indian River Interlinking Agriculturist Association.

“Since the government is yet to give more profits to the farmers, we are demanding farm loan waive and if that is not done, farmers will be left with no choice but to commit suicide,” said Ayyakannu.

Apart from non-availability of institutional credit to the small and marginal farmers, there are gaps in the supply chain and this needs to be addressed though innovative schemes. There should be a concerted effort to increase the income of the farmers.

Proponents of loan waivers, including many state governments at the time, argued that loan waiver would reduce their problems of low investment due to debt overhang. Indebted farmers are unwilling to invest because much of what they earn would go towards interest payment to their banks. It will affect agriculture productivity. Thus, a loan waiver scheme will spur the agriculture economy by providing defaulters with a fresh start.


Debates go on whether to waive or not to waive loans. Barring a few, many believe that loan waiver is not a solution to farmers’ distress. It may bring short term relief. The farmers will look forward to another loan waiver scheme every year. Also, the scheme is not reaching to intended beneficiaries. Small and marginal farmers who constitute more than 80 per cent of farmer population avail loans from private money lenders. They are deprived of the benefits of loan waiver announcements.

Thus, it is imperative that the Government should ensure of MSP of maximum crops. There should be proper mechanism in place to ascertain the kinds of crops are sown region wise in the country. The farmers should be provided right information. They should be educated about reducing input cost, increasing productivity and assured return of their produce. They should go for crop diversification practices. They should also be encouraged to adopt allied activities such as animal husbandry, diary, fisheries and poultry to increase their income.