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Farm Loan Forgiveness: Farmer Debt Is a Symptom, Not the Syndrome


By Pulkit Khatri

In recent years, agricultural loan forgiveness pledges have become a common feature of political party manifestos. The recently concluded parliamentary elections in Punjab, Uttarakhand and Uttar Pradesh were no different. Agricultural loan waivers are seen as an easy way to remedy the situation of struggling farmers. If waivers were such an effective solution, then why, in just a few years, are farmers again distressed and pushed to the point of needing another round of waivers? In addition, do the waivers have an impact on the quality of spending by implementing state governments? Or do they trigger inflation?

We explored these questions in our Nabard-funded study of farm loan waivers in Maharashtra, Punjab and Uttar Pradesh, titled Farm Loan Waivers in India: Assessing Impact and Looking Ahead.

The study analyzed the budgets of the relevant state governments and the impact of agricultural loan exemptions on them. We conducted a survey of around 3,000 farmers in Punjab, Maharashtra and Uttar Pradesh. The study presents an analytical assessment of the survey responses. We analyzed secondary data to explain the financial and behavioral patterns of stakeholders such as state governments, bankers and farmers. Here we share some key findings.

Rather than being the immediate cause of distress, indebtedness appears as a symptom of a farmer’s economic or financial distress. Nearly 87-98% of respondents agreed that income and production issues were more important issues than debt. Income instability due to increased cultivation costs, crop/livestock damage or falling market prices emerged as the main reason for farmers’ distress in the three states. The high degree of threat to crops from stray livestock was yet another significant cause of concern for farmers in the tri-states. Problems related to climate and weather have caused much distress to farmers. Infrastructure problems mainly due to erratic power supply, marketing problems such as non-transparency of market transactions and over-reliance on middlemen, as well as lack of crop insurance or delay in receiving compensation were cited as important triggers of distress.

The inability to earn enough from farming puts a farmer in debt, and recurring losses and declining margins force him to default on his loan. A vicious circle of poverty, loss of income leading to debt, which leads to distress, which in turn triggers further debt and distress, continues unabated for a farmer. A farm loan waiver deals with the indebtedness of the farmer. However, with unresolved distress factors (like continued production losses, market price volatility, unstable incomes, etc.), the condition of farmers after loan waiver improves only for a short period. . Before long, the farmer is back in debt and pushed to the point where he needs new fundraising. Therefore, it appears that a farm loan waiver is proving to be a “jury-rigged expedient” – a quick fix that requires recurring application.

Between 72% and 85% of respondents in our survey agreed that loan waivers cause honest farmers to default on their agricultural loans. It was also found to increase the risk of deliberate failure by farmers. About 68-80% of respondents in the three states mentioned it. More than 90% of respondents in each of the three states pointed out that waivers only benefit a small percentage of the truly distressed farming population. Interestingly, little to no problem accessing new credit for a waiver recipient in the tri-states was reported.

According to the Nabard All India Rural Financial Inclusion Survey 2016-17, only about 30.3% of farm households took loans from institutional sources and about 70% of farm households that did not take any loans from institutions have not enjoyed the benefits of any loan relief scheme. Through our survey, we have found that about 40% of small scale farmers in big difficulty in the three states of Punjab, Maharashtra and UP have not received benefits under agricultural loan relief . More than 90% of respondents in every state felt that loan waivers did not benefit all struggling farmers.

According to the RBI, a crop loan account becomes a non-performing asset (NPA) when the payment of interest (and principal) remains in arrears for two harvest seasons for short-term crops and one harvest season for short-term crops. long-term crops such as sugar cane. We have found that this definition imposes an additional repayment burden on farmers, forcing them to default. For example, in the event of a default (after two bad harvests), the farmer’s access to new credit stops and it cannot be resumed until all outstanding dues have been paid. In other words, if after two failed harvests (and this is how he presumably defaulted), a farmer wishes to restart his credit cycle, then from his third (presumably successful) harvest, he will have to clear slices of three harvest cycles. This is extremely difficult for a struggling farmer, especially when (i) the incomes themselves are low and fluctuating and the next income (from his fourth harvest) will only come after a gap of 4-6 months and ( ii) that he has to fend for his family who would have suffered a loss of income during the previous two crop cycles.

By addressing the issues built into the farm loan NPA definition, the government can actually increase the likelihood that the farmer will repay and will also be able to provide timely assistance to the truly distressed farmer.

Waivers provide immediate, short-term relief to farmers. But what is needed is a long-term solution to the structural problems facing farmers.

Therefore, policymakers must recognize indebtedness as a symptom of farmers’ distress and consider loan waivers as a temporary solution to this symptom. The government should develop alternative ways to targeted aid and support to farmers who are facing distress due to various factors.

The authors work for Arcus Policy Research, New Delhi.