A recent working paper of the World Bank highlights how poorly conceived the UPA government’s 2008 farm loan waiver scheme was actually. In The Economic Effects of Borrower Bailout: Evidence from an Emerging Market, the researchers examine how the fallout of the Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS), that unconditionally waived (either partly or fully) the debts of nearly 60 million rural households—totalling almost $17 billion—varied widely from the potential outcomes its proponents had trumpeted.
Supporters of the waiver had said that farmers, with the yoke of repaying debts with farm income gone, would put surpluses into their farm-holdings, thus driving up agricultural productivity, rural consumption and wages. The researchers found that nothing of the sort happened. Instead, a moral hazard was created with borrowers in good-standing till then perceiving that defaults did not carry any negative consequences. Also, the waiver made borrowers prone to anticipating similar bailouts as possible pre-election sops—ADWDRS came right before the 2009 general elections. Another significant impact was that it distorted priority-sector lending aimed at the farm sector on the ground. It led to moving away of bank credit allocation from districts which had benefited the most to districts that had seen comparatively lower incidences of default—as per the World Bank study, the districts that received above-median bailout funds saw only $0.36 of new lending per dollar of loan waived while those that received below-median sums got $4 of new lending per dollar of loan waived.