Modi Needs To Call Special Parliament Session On Farm Crisis, Put An End To Ruinous Loan Waivers

The second volume of the Economic Survey, which was released by the Finance Ministry on 11 August, has many cautionary notes on the prospects for growth this year. While one part of it clearly is intended for the Reserve Bank of India (RBI) and the Monetary Policy Committee (MPC) that have wrongly focused too long on inflation and less on growth, the larger message is really about new threats to growth that have emerged on the horizon.

We already know about the downswing in economic activity due to notebandi, and the anticipatory slowdown that is happening right now as various players adjust to the new goods and services tax (GST) regime, but the real additional concern that Chief Economic Adviser Arvind Subramanian flagged in the second volume of the survey was the deflationary impact of farm loan waivers. Volume II of the survey, normally released along with Volume I before the Union budget, was released separately as the budget date was advanced this year. The wait though has been well worth it.

Subramanian notes that states (UP, Maharashtra, Karnataka and Punjab among them) have already announced waivers worth Rs 1.25 lakh crore; if all states opt for waivers, the figure could rise to Rs 2.7 lakh crore. This figure is in line with estimates made by Bank of America Merrill Lynch, which talked of total waivers rising to Rs 2.57 lakh crore before the Lok Sabha elections in 2019.

But the survey’s main contribution to the debate is that farm loan waivers are deflationary – that is growth-destroying. According to Subramanian’s estimate, gross domestic product (GDP) growth will be impacted by 0.35 per cent to 0.7 per cent, since states will have less fiscal space to invest in infrastructure and other areas, which are growth enhancing.

Put simply, money spent on loan waivers is essentially robbed from infrastructure and other spends. The survey calculates the dent in demand due to this misdirection of resources to be in the range of Rs 58,000-Rs 114,000 crore, with the lower end applying to loan waivers already announced, while the higher end applies if more states join the queue.

Normally, any waiver of agricultural loans should lead to a surge in demand as purchasing power in the hands of farmers improves, and banks also benefit from having bad loans to agriculture taken off their books. They should thus have cleaner balance-sheets, and be prepared to lend more.

But in practice, the opposite happens. As loan waivers get spaced out over months, if not years, after the announcement, farmers with existing loans delay repayments in order to benefit from the forthcoming write-off. Banks themselves start tightening norms for lending to farms in the interim, as they know there is a higher chance of the loans going bad. The net result of an announcement is thus a slowdown in farm lending, despite an apparent improvement in levels of indebtedness in the farm sector, and a reduction in the non-performing assets (NPAs) on banks’ books.

Politicians tend to draw the wrong comparisons by pointing out that helping farmers with a few thousand rupees of loan write-offs is morally more justifiable that giving big business loan benefits worth thousands of crores.

There are two crucial differences worth noting here.

First, bad loans to businesses are not written off in bulk; they are written off on a case-by-case basis. Those who are in a position to repay are not given the same concessions as those who have failing businesses on their hands. If farm loans were written off on the basis of selectivity, they would be justified. Right now, the better off farmers ride on the backs of the poorer ones who may be entitled to loan relief.

Second, when promoter loans are written off, they can lose not only their shareholdings, but also other assets offered as collateral. With the notification of the new insolvency and bankruptcy code, promoters will have less of a chance to cheat the system by doing private deals with bankers or opting for delays by moving courts. In the case of agricultural loans, many loans are often not backed by collateral. Hence, the loss is seldom going to result in the loss of assets for the farmer.

Given the ruinous relationship between farm loan waivers and growth, not to speak of credit and repayment culture, the question of farm loan waivers needs to be treated as a national problem needing national solutions. It is not politically possible to prevent one state or the other from doing waivers based on the politics of expediency unless all states and the centre are bound by the same constraints.

A few ideas to make this happen.

One, Parliament needs to hold a special session on farm issues, and waivers should be one of the topics on which consensus must be evolved. This special session should be preceded with detailed studies on the investments that need to go into agriculture, and how to find ways to improve productivity so that fewer people need to be stuck on farms. India cannot have higher farm productivity, and half its people living off meagre farm incomes.

Two, farm loan waivers should be selective, and based on objective criteria for relief. This relief should not be politically determined. In fact, the focus should be on subsidised crop insurance that is universal for small and medium farmers, and offered at small cost to larger farms.

Three, multiple subsidies for farmers – on power, diesel, fertiliser, seeds, etc – need to be abandoned and replaced with income support to small and marginal farmers – sort of direct benefits transfer to farmers. The big farmers will benefit anyway from their higher ability to mechanise and from an expansion of irrigation and crop insurance.

Four, there should be fiscal penalties for generalised loan waivers, whether offered by centre or states. There is no point banning state waivers when the Centre faces no such restraint. It was the massive United Progressive Alliance farm loan waiver of 2008 that set the stage for the current rash of state waivers this year. Now, with many big states leading the way, it is impossible to stop the madness.

Waivers aren’t the way to go. They lead us to moral hazard and fiscal ruin and put speed-breakers on the road to growth. That is hardly something any farmer would wish for. Slow growth is more worrisome for the rural sector, since it not only dents returns from farming, but also reduces prospects for the creation of non-farm jobs.