Do Loan waivers Really Solve Problems of Farmers?

The Rajasthan government recently joined the loan waiver bandwagon, perhaps with an eye on the upcoming State Assembly elections. But do the loan waivers ...

More than half of farming families in India are indebted. The average outstanding loan of a farming family is about Rs. 47,000, while the average monthly income is about Rs. 6,400. Over 8,000 farmers committed suicide in 2015, an increase of 42% from 2014. To overcome the problems of farmers’ indebtedness and rising suicides, various state governments have announced loan-waivers for farmers. The Rajasthan government recently joined the loan waiver bandwagon, perhaps with an eye on the upcoming State Assembly elections. But do these loan waivers actually help farmers?

Since independence, policies of various governments on farming have restricted farmers in many ways. Farmers do not have the freedom to determine the price of their crops and are often dependent on government-determined prices. They are also coerced to sell their produce only at authorised mandis, which benefits the traders and middlemen more than the farmers. In most states, agricultural land cannot be sold to a non-agriculturist. This policy reduces the value of the farmland since there is a lack of buyers as only a farmer can buy the farmland.

The loan-waiver scheme of government caters mostly to the rich farmers since they borrow from formal sources such as banks and other financial institutions. Most of the small and marginal farmers are dependent on informal sources of credit such as money-lenders, relatives and friends. In fact, only 23% of farmers who own less than 0.1 hectares of land have access to formal credit, and even less actually do obtain credit from formal sources. Thus, about one in every five farmers benefit from loan waivers.

Debt-forgiveness by the government also leads to the problem of moral hazard, as it encourages farmers to take more loans in the hope that their liabilities will be waived off by the government in future. Consequently, the non-performing assets of banks increase, creating an additional burden on the taxpayers (about 70% of banking business in India is done by the government-owned public sector banks). Between 2008 and 2013 agriculture-related bad loans from public-sector banks have grown from ₹ 7,000 Crore to ₹ 30,000 Crore. The loan waivers given by various governments have neither reduced farmer suicides caused by indebtedness nor has it reduced the overall distress in the agriculture sector. In 2014, Telangana government announced a loan waiver of ₹ 17,000 crore to around 30 lakh farmers; in 2015, the state again witnessed 1,400 farmer suicides.

If the government really wants to relieve the stress in the farming sector, it should remove the restrictive policies imposed on farmers. These restrictive policies trap farmers in agriculture and a vicious cycle of poverty while reducing their opportunities in the non-agriculture sector. Most farmers committing suicide are sitting on valuable lands which they cannot use, and are forced to sell their products at low prices and remain stuck with low income.

READ MORE: Yes, It Is Possible for Farmers to be Prosperous!

Instead of giving loan waivers, we should allow farmers to use their resources to generate more revenue so that they can invest more capital and gain from scaling-up their operations. The farmers should be free to sell their produce at the price determined by them directly to the consumers without having 3-4 middleman cut into their profits. What farmers need is freedom from harmful interferences by the government.