Is loan waiver a panacea for rural distress?

Loan waivers adversely affect marginal farmers due to a reduction of formal credit channels given to them

Karnataka election, HD Kumaraswamy, Andhra Pradesh, Rajasthan, Maharashtra, APMC Act
Globally, India has the second largest amount of arable land (next only to the US), but less than 35% of this land comes under irrigation.

On the eve of the Karnataka election, waivers of farm loans were one of the major election promises. Now, chief minister HD Kumaraswamy wants to fulfill his pre-poll promise and even threatened to resign if he cannot fulfill his promise. As has been seen time and time again, “farmers first” provides political mileage. With more than 55% of Indians earning their livelihood from the agricultural sector, it comes as no surprise that political parties like to place their bets on the farmers’ cause. However, the real benefit to the farmers won’t come from loan waivers.

We studied responses to farmer distress in Andhra Pradesh and Rajasthan (Farmer Distress: An Analysis of Intervention in Rajasthan and Andhra Pradesh, India Consensus Report, 2018). Of the two states, farmer distress appears more pronounced in Andhra Pradesh, which has one of the highest national rates of farmer suicides, at 47 per 1,000 population, between 2010 and 2012. Nationally, in 2012 -15, over 10,000 farmers committed suicide.

Last year, Uttar Pradesh, Maharashtra, and Punjab undertook large-scale farm debt waivers, costing 0.5% of the GDP of India, and Andhra Pradesh recently announced a loan-waiver costing Rs 24,000 crore. However, our study and other academic literature, finds that a loan waiver scheme costs about as much as it achieves. Moreover, it mostly helps richer and bigger farmers, leaving smaller farmers worse-off in the future.

Only 15% of the marginal farmers (with less than 1 hectare of landholding), have access to formal credit, so a loan waiver helps them little. In fact, previous waivers have led to banks reducing credit outlay for small farmers during their next loan cycle, thereby diminishing their chances of getting formal loans. Loan waivers actually do harm to the small farmers, as with less credit outlay from the formal sector, the small farmers increasingly have to depend upon the informal sector. The cost difference for loan rates between the formal and informal sectors vary between 30-45%, annually.

In terms of generating a benefit-cost ratio, our work for Andhra Pradesh shows that waiving formal loans for land holders with less than two hectares would cost Rs 24,860 crore. The benefits will be slightly lower at Rs 24,629 crore. Giving out a rupee to achieve just 99 paise of benefit is a poor deal. It also means a 15% reduction in smallholder credit over the following years, cutting revenue for the most vulnerable farmers by 13.5%. Importantly, spending thousands of crores on less effective policies leaves less for much more effective ones. The benefit-cost ratio for Rajasthan also yields a value of less than one, suggesting that the undertaking of loan waiver programs does not make sense at all.

Evidence suggests it is the big farmers who usually corner the bulk of the formal loans and use them to buy farm equipment like tractors, and combine harvesters. Small farmers, on the other hand, often sell their output forward to the village level aggregators (Arthiya), from whom they typically take loans for growing crops at a higher rate. These marginal farmers do not have access to cold storage. It is impossible for them to get a space in the state storage facilities without political patronage, and also because the smaller farmers do not grow enough to book an entire crate in warehouses. Nearly 20% of India’s fresh produce is wasted because of storage problems.

Globally, India has the second largest amount of arable land (next only to the US), but less than 35% of this land comes under irrigation. And, when crops fail because of bad rainfall, the smaller farmers bear the brunt. The median annual wage for a farmer in India is around $290, which is barely two months’ minimum wage in Mumbai – the commercial capital of India. This has led to unequal income distribution in India, with rural-urban wage gap at 45% in comparison to around 10% for China and Indonesia. Some 850 million people still live in rural India. India has around 260 million people living in poverty and 80% of them live in the countryside.

Loan waivers are not a panacea for these marginal farmers. Instead, supply side interventions such as the electrification of villages, rain water harvesting, and building of roads and canals, will help mitigate losses due to crop failures. Additionally, other factors, such as reforming the Agricultural Produce Market Committee (APMC) Act are necessary. Lack of reforms in the APMC Act prevents small farmers from selling directly to supermarkets, exporters, and agro-processors.

Reforms and the introduction of an e-market will gainfully help them. As evidence from Rajasthan suggests, because of the introduction of an e-market, farmers witnessed a price premium of 13%. Waivers of farm loans may help any political party win an election once. For them to win an election twice however, it is important to undertake policy measures that will make a real difference to the life of poor farmers.

The writer is Professor, Bennett University

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