Agriculture plays an important role in the Indian economy with over 58 per cent of rural households dependent on agriculture for their livelihood.
Background of fall in agricultural growth in India –
Growth rates of agriculture production from the 1990’s till the mid-2000’s was lower than that in 1980’s. This was accompanied by withdrawal of institutional support from the Government. This took place in several ways –
- On account of joining the World Trade Organisation in 1995 by India, the protection offered to many commodities from imports weakened, this in turn resulted in fall in output prices of these products.
- Secondly, as part of the fiscal reforms, major input subsidies were rationalised which in turn resulted in increase in cost of inputs such as seeds, fertilisers, electricity, etc.
- The rise in input prices was not matched by a corresponding increase in output prices and crop yields and minimum support prices were not available to all farmers, particularly small and marginal farmers.
- Public capital formation in agriculture continued to fall and growth of public expenditure on agricultural research plateaued down.
- The agricultural sector also suffered from chronic lack of access to formal credit and insurance which in turn dissuaded the farmers from adopting improved seeds, fertilisers and implements.
- There was also rise in share of informal source of credit. This in turn resulted in increase in indebtedness due to high rates of interest.
History of Debt Relief in India –
- During the 19th Century on account of lack of focus of the colonial rulers, India was subjected to several famines. Famine Commissions were appointed and as a follow-up to the reports, two important legislations were enacted – Land Improvement Loan Act, 1883 and Agriculturists Loans Act.
- As per the Land Improvement Loan Act, it was mandated that long-term loans could be advanced after the authorisation of the Central Government which could be repaid in instalments. The Agriculturists Loan Act was enacted for short-term credit facilities.
- In order to regulate the money lending business in the country, the Usurious Loan Act, 1918, was enacted which authorised the Judiciary to relieve the debtors of the liability to pay excessive interest.
- Similarly, Provincial Acts such as Punjab Relief of Indebtedness Act, 1934, and Bihar Money Lenders (Regulation of Transactions) Act, 1939, were also enacted.
Central Debt Waivers –
The massive write-off of loans during 2009 parliamentary elections took its toll on the banking system and it might have served as one of the important causes for the rise in the Non-Performing Assets (NPA) of the banking system, which had increased three-fold between 2009-10 and 2012-13.
Recently Announced State Loan Waivers –
- Maharashtra Government had in June 2017 announced agricultural loan waiver for loans taken between April 1, 2012 and June 30, 2016, the time line for agricultural loans was later extended to loans taken from 2009 onwards. It has been estimated that this loan waiver would benefit 8.9 million farmers which would cost Maharashtra Exchequer Rs. 340 billion.
- In case of Uttar Pradesh, the Government has dropped its plan of raising finance by floating ‘Kisan Rahat Bonds’ for financing the farm loan waiver scheme and would be financing the loan waiver from it’s budgetary resources.
- Karnataka has also announced a debt waiver to the tune of Rs. 81.7 billion for farmers availing loans from co-operatives. The latest to join the band wagon of debt waivers is Rajasthan, which has announced waiver of all farm loans up to Rs. 50,000 per farmer. The debt waiver is expected to cost the state govt. up to Rs. 200 billion.
- With reference to the spate of loan waiver announcements, it has been clarified by the Union Finance Minister that it would not provide any budgetary support to such states. The UP model is expected to serve as a template for other state governments which have announced loan waiver schemes.
- For the first time in more than 10 years, the Gross Fiscal Deficit (GFD)-GDP ratio at 3.6 per cent crossed the threshold of 3 per cent, but this was mainly due to the significant increase in capital outlay and loans and advances to power projects (UDAY scheme). The proposed debt waiver scheme would presumably lead to further deterioration of the fiscal position of the state governments.
Impact on Banking System –
For banks under stress, the share of assets under stress has approached or reached 20 per cent. A high and rising proportion of banks’ delinquent loans, particularly those of public sector banks and a consequent increase in provisioning for NPAs has weighed down on credit growth during the past few years reflecting their lower risk appetite and stressed financial position. These schemes may further vitiate the credit culture and may add to the stressed assets of the banking Industry.
Debt Waiver as an initiative appears to be a short-term solution for a long-term malady. The biblical proverb ‘give a man a fish and you feed him for a day, you teach a man to fish, you feed him for life’ is quite apt in this scenario. Major investment in the agricultural sector is the need of the hour which may lead to increased mechanisation, improved access to the market place for the farmers, better ware-housing and transportation facilities. This would enhance the profitability of the farmers and would strengthen their capacity to weather rough times such as droughts, natural calamities, which is generally the time when they become susceptible to indebtedness.
Debt-waivers are the short-term solution for a long-term malady. It is advisable for the government o increase investment in the agricultural sector to double the farmers income by 2022 as per the target of the government. Let us see how debt-waivers are in fact a bane for the farmers.
‘Give a man a fish and you feed him for a day, you teach a man to fish, you feed him for life’ is quite apt in the debt-waiver scheme scenario. Critically discuss.