1. Farm loan waivers: Why states should consider replicating PM Narendra Modi’s stand

Farm loan waivers: Why states should consider replicating PM Narendra Modi’s stand

Politics in India, in part, thrives on competitive populism. So, when the Adityanath government announced a farm loan waiver after coming to power in Uttar Pradesh, it didn’t take too long for the clamour for a similar waiver in Maharashtra to grow louder.

By: | Published: May 23, 2017 7:10 AM
Prime Minister Narendra Modi (PTI)

Politics in India, in part, thrives on competitive populism. So, when the Adityanath government announced a farm loan waiver after coming to power in Uttar Pradesh, it didn’t take too long for the clamour for a similar waiver in Maharashtra to grow louder. The opposition parties—the BJP is in power in both UP and Maharashtra—milked the situation. Agriculture remains a hot button issue in the country and therefore any statement that can be spun as being “anti-farmer”, even though it may reflect sound policy, is politically fraught. Against such a backdrop, Union agriculture minister Radha Mohan Singh making it clear that the Modi government isn’t considering any such waiver—as of September last year, outstanding farm loan stood at `12.6 lakh crore (`7.75 lakh crore in crop loans and `4.84 lakh crore in term loans)—is a big political gamble, especially as the government enters its fourth year. But it is also welcome change in policy-thinking.

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Even though two consecutive years of drought brought down farm growth, waivers should no longer be thought of as a solution. Most public sector banks—they had to bear the bulk of the priority sector lending obligations—are burdened by NPAs and are far short of the capital adequacy levels desired. Even if the government pays back the banks the loan amount, waivers create moral hazards, and across sectors, which ultimately pollutes the entire credit and repayment culture at large. The course that Singh charts instead to support the farm sector merits serious consideration. He speaks of taking affordable credit to small and marginal farmers—who wouldn’t have benefitted in the waiver scenario anyway, given their lack of access to formal finance—and tying a post-production interest subvention to negotiable warehouse receipts. This not only prevents distress sale, but also incentivises farmers’ working towards raising productivity.

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