1. RBI Guv Raghuram Rajan questions farm debt waivers

RBI Guv Raghuram Rajan questions farm debt waivers

Questioning the effectiveness of the government’s farm debt waiver programmes, RBI governor Raghuram Rajan on Saturday said such schemes have constrained flow of credit to farmers instead. “In some states, on certain occasions, we have had debt waivers. How effective these debt waivers have been? The studies that we have typically show that they have […]

By: | Udaipur | Published: December 28, 2014 1:52 AM

Questioning the effectiveness of the government’s farm debt waiver programmes, RBI governor Raghuram Rajan on Saturday said such schemes have constrained flow of credit to farmers instead.

“In some states, on certain occasions, we have had debt waivers. How effective these debt waivers have been? The studies that we have typically show that they have been ineffective. In fact, they have constrained the credit flow post-waiver to the farmers,” he said, speaking at an event in Udaipur.

“One question is, how else we should deal with over indebtedness in the farm sector. Also worth examining is the very important issue of farmers’ suicides. How many of them are caused by indebtedness, especially to the formal (banking) system, and how much does the formal system alleviate indebtedness,” the governor said.

Andhra Pradesh and Telangana governments had recently declared loan waivers for farmers hit by cyclone Phailin last year. While the Telangana government has given the mandated 25% of the written off loan amount to the banks, Andhra Pradesh has not done it so far. Banks have over R1.3 lakh crore exposure to the farm sector in these two states.

In 2008, the then UPA government at the Centre had come out with Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS) 2008, under which 3.69 crore small and marginal farmers and 60 lakh other farmers were given debt relief to the tune of R52,516 crore. Government auditor CAG had found that in several cases, ineligible farmers were given the benefit, while the deserving were left out, pointing to large-scale possibility of fraud.

Talking about subsidies for the farm sector, Rajan said it will be useful to see whether these subsidies have actually helped agriculture or not.

“The positive aspect is that you are giving a benefit, a cheap credit to agriculture. The concern, however, is whether this credit is being put to right use or is it leading to over-indebtedness or distortionary investment? We, for example, have crop loan that we have subsidised. But we don’t subsidise longer-term loans. Does that change the nature of what kind of activities are subsidised in agriculture? So that’s one issue…,” he said.

On inflation, Rajan said the central bank would like to focus on medium-term inflation targeting and will not chase the short-term goals. “The medium term is what gives you time to let the economy adjust to the changes that are happening. This is the sensible inflation targeting that we have to debate about,” he said.

Rajan stressed no country in the world chases short-term inflation target ignoring domestic and global developments. “What typically done is … medium-term flexible inflation targeting … We want to achieve this objective and we are going to give a time to reach that objective. And if we go off track we will recalibrate to reach that objective within the medium term. So, I don’t have to achieve tomorrow, but I have to try and get back to it over the medium term,” he said.

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