Farm loan waivers: Farmer indebtedness a symptom, not the syndrome

By Pulkit Khatri

In the last few years, promising farm loan waivers has become a common feature in manifestos of political parties. The recently-concluded assembly elections in Punjab, Uttarakhand, and Uttar Pradesh were no different. Farm loan waivers are seen as an easy route to address the situation of distressed farmers. If waivers were such an effective solution, then why, in only a matter of few years, are farmers distressed again and are driven to the point of needing another round of waivers? Besides, do waivers impact spending quality of the implementing state governments? Or do they trigger inflation?

We explored these questions in our Nabard-funded study on farm loan waivers in Maharashtra, Punjab and Uttar Pradesh, titled Farm Loan Waivers in India: Assessing Impact and Looking Ahead.

The study analysed the budgets of the state governments concerned and the impact of farm loan waivers on the same. We conducted a survey of about 3,000 farmers in Punjab, Maharashtra and Uttar Pradesh. The study presents an analytical assessment of survey responses. We have analysed secondary data to explain financial and behavioural pattern of stakeholders like state governments, bankers and farmers. We share some key findings here.

Instead of being the immediate cause of distress, indebtedness emerges to be a symptom of economic or financial distress faced by a farmer. Nearly 87-98% respondents agreed that income and production-related issues were bigger problems than indebtedness. Instability of income due to increased cost of cultivation, damage to crop/livestock or fall in market prices emerged as the primary reason for farmer distress in the three states. The high degree of threat to crops from stray cattle was yet another important cause of concern to farmers in the three states. Climate and weather-related issues caused much distress to the farmers. Issues with infrastructure mainly on account of erratic power supply, problems of marketing like non-transparency in market transactions, and excessive dependence on middlemen, and absence of crop insurance or delay in receiving compensation were cited as important triggers of distress.

Inability to earn enough from farming makes a farmer indebted, and the recurrent losses and falling margins make him default on loan repayment. A vicious cycle of poverty, of income losses leading to debt, which leads to distress, which in turn sparks off further debt and distress, continues unabated for a farmer. A farm loan waiver addresses the farmer’s indebtedness. However, with unaddressed factors of distress (like continued production losses, volatility in market prices, unstable incomes, etc), the condition of farmers after a loan waiver only improves for a short period. In a matter of time, the farmer is indebted again and driven to a point of needing a fresh round of waiver. Therefore, it appears that a farm loan waiver proves to be a ‘jury-rigged expedient’—a quick fix that requires recurrent application.

Anywhere between 72% and 85% of the respondents in our survey agreed that loan waivers pushed honest farmers to default on their agricultural loans. It also emerged that that these increased the chances of wilful defaults by farmers. About 68-80% respondents in the three states mentioned this. More than 90% respondents in each of the three states stressed that waivers only benefitted a small percentage of the actually distressed farmer population. Interestingly, little or no problem in accessing fresh credit for a waiver beneficiary in all the three states was reported.

As per the Nabard All India Rural Financial Inclusion Survey 2016-17, only about 30.3% of agriculture households took loans from institutional sources and about 70% of agriculture households who did not take any loans from institutions were left outside the ambit of benefits from any loan waiver scheme. Via our survey, we found that about 40% of the highly distressed small farmers in all three states of Punjab, Maharashtra, and UP, did not receive benefits under farm loan waivers. More than 90% respondents in each state felt that loan waivers did not benefit all the distressed farmers.

As per RBI, a crop loan account becomes a non-performing asset (NPA) when the instalment of interest (and principal) remains overdue for two crop seasons for short duration crops and for one crop season for the long duration crops like sugarcane. We found that this definition imposes an additional burden of repayment on farmers, forcing them to default. For example, in case of default (after two failed crop season), the farmer’s access to fresh credit stops and it can be resumed only after he clears all his pending dues. In other words, if after two failed crops (and that is how he presumably defaulted), a farmer wishes to restart his credit cycle, then from his third (presumably successful) crop, he will have to clear instalments of three crop cycles. This is extremely tough for a distressed farmer, particularly when (i) incomes themselves are low and fluctuate and the next income (from his fourth crop) will come only after a gap of 4 to 6 months and (ii) he has to fend for his family who would have suffered from loss of income in the earlier two crop cycles.

By addressing the issues embedded in the farm-loan NPA definition, the government can actually increase the likelihood of the farmer repaying and will also be able to provide timely help to the genuinely distressed farmer.

Waivers provide immediate and short-term relief to farmers. But what is needed is a long-term solution to the structural problems faced by farmers.

Therefore, policy makers need to acknowledge indebtedness as a symptom of farmer distress and view loan waivers as a temporary solution to that symptom. The government should evolve alternative means to targeted relief and support to farmers who face distress on account of various factors.

The authors are with Arcus Policy Research, New Delhi.