Why loan waiver is a Bad Idea for India?

There is no doubt that despite achieving high growth rate since post liberalization phase, agriculture sector remained lack luster. The growth rate in agricultural sector not only saw a variable pattern, but during some years it displayed a negative growth. Our coutry is still heavily dependent on agriculture. Nearly 58% of the population is directly or indirectly dependent on it, yet the contribution of agri-sector is just around 15% of the GDP. This means more than 58% of the population generates 15% revenue year on year.

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This is not good for economy.

Since their income is less, hence they are from the most vulnerable section of society. If 58% of the population will be vulnerable than nation will itself be vulnerable. Every year we listen the news of farmers’ suicide. When a person doesn’t find any ray of hope for survival, he takes such an extreme steps.

Reasons of farms distress in India.

Too many people involved in this activity which is less remunerative than service and manufacturing sector.

Dependence on monsoon which is simply unpredictable even for scientists.

Low productivity per hectare compared to other big agricultural producer countries. For example USA produces double quantity of Paddy from the same field size. We have 2.4% of the total land area of the world but more than 17% of the population.

Low level of technological awareness in agricultural field.

Poor irrigation system.

Poor and informal credit system. Since farming is a risky business in India and Farmers are predominantly poor in our nation, so they need credit before each sowing season for seeds, fertilizers and pesticides. But many of them are unbanked and away beyond the reach of formal credit system. Hence they take loan from Moneylenders at exorbitant rates and even in slightest of variations in their expenditure pattern such as any marriage ceremony, illness etc. they are web trapped.

The list goes on and on. Even though the problem persists for many decades, the government did not perform well in addressing their issues permanently. Only band aid solution was provided and that too at the time of election.

Waving of farmers’ loan is one such example. Farm loan waiver means government pays the loan taken by the farmer back to the Banks in case if the farmer is unable to repay it.

No doubt majority of  Indian farmers are cash strapped but waving of farmers loan only for the sake of winning the election is not good for the nation’s economy.

Some of the reasons could be:

It destroys the formal credit system of the nation.

Every time government wave off the loans, the burden falls on the government. Indian economy has always seen a high Debt to GDP ratio. This additional burden worsens the condition.

Fixed Capital Formation gets severely impacted because of the loan waivers. For example in Uttar Pradesh nearly Rs. 36,000 crore was waived off. This could have been utilized in building infrastructure such as rail, road educational institutions, hospitals etc.

It impacts farmers’ behavior and in anticipation of loan waiver before elections, they become willful defaulters and they shy away from paying it

India is already struggling with Non Performing Assets. These unpaid loans also have a role to play in it.

Loan waiver can’t help the all the famers as India still lacks financial inclusion in credit system. Many of the farmer takes loan from money lenders and loan waiver is only helpful for those who have taken loan from formal credit agencies.

So instead of giving loan waiver government should make effort for the permanent solution to the permanent problem. Some of the measures in right direction could be increase in investment in farm technology, increasing the formal credit system among farmers, interest subvention, increase in irrigation facility, better remunerative price and procurement policies.