Farm Loan Waiver: Bad Economics, but Modi Govt May Still Go Ahead

Is the country’s banking system prepared for yet another shock, saddled as they already are with swelling bad loans? (Photo: iStock)

One of the first decisions the incoming Bharatiya Janata Party (BJP) government in Uttar Pradesh is set to take is to waive off loans given to small and marginal farmers.

What is not clear yet is whether crop loans given by cooperative banks alone will be written off or will the scheme include all advances extended by all banks, including scheduled cooperative and scheduled commercial banks.

We do not know whether the scheme will be implemented throughout the country. However, given the clamour for farm loan waiver across the country, the BJP government at the Centre may extend the scheme to other states as well.

Banking System Cannot Absorb Additional Burden

But is the banking system in the country prepared to take yet another shock, saddled as they already are with burgeoning bad loans?

Top honchos of leading banks have already voiced their concerns.

State Bank of India chairman Arundhati Bhattacharya has gone on record saying that loan waiver schemes vitiate the credit culture and make it tougher for banks to continue lending to these segments.

But will her and similar other voices be heard?

The Bare Facts

Before proceeding further, let us consider some facts:

(Photo: The Quint)

(Photo: The Quint)

Very Little Benefit to Farmers

The question now is all this cost for what?

We have a 2008 precedence when the then United Progressive Alliance (UPA) government headed by Manmohan Singh had announced a massive debt waiver scheme for farmers, just a few months before the Lok Sabha elections.

The scheme, with a cost of Rs 52,000 crore, may have helped the Congress-led UPA to return to power in 2009, but did very little to mitigate rural distress.

My analysis based on National Crime Record Bureau data shows that the rate of farmers’ suicides, one of the extreme manifestations of rural distress, marginally dipped in 2009, but shot up subsequently.

Another study by the World Bank on the impact of the 2008 farm loan waiver scheme concludes that:

The bailout led to a significant reallocation of bank lending, away from districts with greater exposure to the bailout.

In other words, banks started moving away from areas prone to risky loans. In fact, the credit availability of indebted farmers came down sharply following the rollout of the scheme.

The study’s second conclusion is that “the program had no positive impact on productivity, consumption or labour market outcomes, but led to significant moral hazard in loan repayment.”

The study conclusively establishes that the 2008 farm loan waiver scheme was bad economics. 

But then who cares for economics, good or bad, as long as political benefits are expected?