Debt cancellation does not solve the problem of farmers' distress but exacerbates it because it reinforces overproduction and loss making. It may be politically appealing but is economic nonsense.
Rahul Gandhi has just launched a campaign to force the prime minister to cancel the debts of all farmers, rich and poor, large landholders and small. Moral hazards do not matter to politicians. Cautious, financially responsible farmers who repay their loans are made to look like fools. In loan waivers as in demands for reservations, any large demonstration in the capital city with a modicum of bus burning gets the government on its knees. The new chief minister of Madhya Pradesh cancelled farmers’ loan debts as his first policy act. Rajasthan and Chhattisgarh governments have also followed. No questions asked.
Farm loan waivers are not new. They have been the politicians’ pet scheme for at least thirty years. There used to be loan melas where farmers were showered with loans at favourable i.e., subsidised rates. Ever since the green revolution of the sixties of the last century, farmers have had subsidised water and power and seeds. They have been guaranteed minimum support prices (MSP). India is no longer short on food as it was in the early sixties of the last century. It has surplus stocks of food grains rotting in warehouses. Yet, the farmers’ distress persists.
There are short cycles of boom and bust in farm prices. Right now, we are going through a period of low prices for farm products while, during the UPA II, there was rampant inflation in farm prices. Thus, the distress is a sign of success of a low inflation policy. What the farmer wants—sustained high food prices—hurts the poor- and middle-income consumers the most. Too many farmers produce too much output. Debt cancellation does not solve the problem of farmers’ distress but exacerbates it because it reinforces overproduction and loss making. It may be politically appealing but is economic nonsense and harmful as an opiate drug would be.
The reason why we have farmers’ distress has to do with a flawed industrial strategy adopted since the beginning of planned development by Pandit Nehru. Not only were capital-intensive industries given primacy (and hence job creation in manufacturing was low) but the organised sector was riddled with labour laws which discouraged the setting up of large labour-intensive enterprises. Every other developed country moved the rural surplus labour to urban areas where industry was hiring manual workers. India missed out on that and a large proportion of population persisted in rural areas and engaged in agriculture. Labour market reform has been an untouchable area under governments of all parties. The Modi government shifted the responsibility on to states knowing full well that it meant no action. So we are stuck with a large number of farmers.
About 80% of these farms are too small to afford a sustainable livelihood. Congress once had the ambition of land reforms and having cooperative farms with land consolidation but nothing happened on that front. So small fragments of land continue to be cultivated. But borrowing has been made easier. That keeps farmers tied to the land since they know debt forgiveness will come.
Of course the populist argument is that big debts are forgiven as is obvious in the NPAs of PSU banks. So why insist farmers pay their debts?
Perhaps the single best achievement of the Modi government in the economic sphere has been its reform of the insolvency legislation. This will be a game changer. Debtors cannot escape repayment or sequestration of their assets. If that logic is to be followed, farmers should not get repeat write-offs of debts. The rule should be that if a farmer has come repeatedly, say thrice, for a loan waiver then he has to sell his land. This may sound harsh. It is, however, a question of equity. Farmers are private sector business people. They are presumed to be poor and struggling, though they own land and agricultural incomes are tax exempt. They qualify for loan waivers.
But no urban or non-agricultural worker gets a loan waiver. A family cannot renege on EMI payments and ask for cancellation of its mortgage debt or its car loan. Even MSME owners do not get debt forgiveness. Why should a farmer? Inability to repay debt indicates a non-viable business. Why should one part of the private sector be singled out for debt forgiveness. At the very least, the government should examine whether the debtor is genuinely strained or just offloading his debts to protect his assets. Just being romantic about kisans is not sound economic policy.
A more creative strategy would be to combine debt cancellation with the facility to quit farming. If not for the present generation of cultivators, then at least for their children. Debt cancellation should require the guarantee that children will relocate. Governments could incentivise this by giving stipends to learn a new trade. The long-run aim should be to shrink the number of farmers. The policy should be to retain only those farmers who are financially responsible, economically efficient and not a burden on the public fisc. Will it happen? Put no money on it.
The author is Prominent economist and labour peer