Assessing Farm Loan Waivers

What is the issue?

With mounting pressures from farmers, many state governments are announcing farm loan waivers.
It is essential, in this context, to assess the sustainability of this option as well as to look for alternative solutions.

Why are loan waivers not advisable?

Farm loan waivers are a quick-fix solution to farmers' distress.
They may temporarily alleviate the problems of those farmers with access to formal banking.
It ignores the real needs of the many poor farmers who rely on moneylenders.
They also do not address the fundamental problems of Indian agriculture such as rising costs and falling profitability.
Also, waivers destroy the country’s credit culture as certain borrowers tend to default in anticipation of the waiver.
Fresh lending to defaulting borrowers is stalled.
As, banking regulations prohibit disbursement of fresh loans to defaulters unless the loans are restructured.
Significantly, governments fund loan waivers through borrowings.
This, in turn, results in increased sovereign indebtedness, higher interest expenses and deteriorating fiscal deficit.
Consolidated fiscal deficit is already under stress due to increase in crude oil prices and populist schemes ahead of general elections.
Besides these, farm loan waivers crowd out agriculture-related investments in areas such as irrigation and research.

What are the sustainable mechanisms?

Institutional mechanisms like crop insurance and interest subvention are far more effective in tackling farm loan crisis.
State Bank of India has recommended an income support scheme for small and marginal farmers in the place of loan waivers.
It has estimated the annual cost to be Rs. 50,000 crore or 0.3% of GDP.
This is just a fraction of the Rs. 1.9 lakh crore farm loan waivers announced since April 2017.
Income support makes direct benefit transfer (DBT) to targeted recipients.
It could also increase banking penetration in rural India.
E.g. Telengana has launched the ‘farmer investment scheme’
Under this, each farmer receives Rs. 8,000 per acre payable in two equal instalments ahead of the kharif and rabi season.
This is to meet their seed, fertiliser, pesticide and field-preparation expenses.

What can the government do for finances?

CPSE - The government must stop the divestment of central public sector enterprises (CPSEs).
It may instead raise substantial funds by rationalising CPSE balance sheets.
CPSEs may dispose the low yielding assets along with the vast surplus property holdings to reduce their debt.
They can enhance their dividend and tax-paying ability and improve their return on assets and valuation.
So by streamlining CPSEs’ balance sheets, the government will be able to address the farm loan crisis without impairing the fiscal deficit.

Bonds - The government can issue callable deep discount bonds (CDDBs).
Deep discount bonds are bonds whose interest accumulates during the tenor of the instrument.
These are paid at maturity along with the principal repayment.
The 'callable' nature of CDDBs allows the government to pay it off earlier than the maturity date.
The government may issue CDDBs of multiple tenors, like 5-year, 10-year, and 15-year, targeted at retail and institutional investors.
The issue of CDDBs will enable the government save on cash interest outgo during the tenor of the instrument.
It can thereby moderate the consolidated fiscal deficit.
Along with these, large-scale investments in agricultural storage, processing, marketing, transportation, financing and insurance are important.

Source: BusinessLine