Vijay Mahajan	|   Print |
03.24.2008	|   PDF |
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In the national budget for 2008-2009, India’s Finance Minister Palaniappan Chidambaram has proposed that the federal government will waive loans to farmers, with the total waiver amount capped at Rs 60,000 crore ($15 billion).

 

The waiver, however, is highly questionable on at least three grounds.

 

One, it is iniquitous, since it will largely benefit large, commercial farmers. Two, it is not a long-term solution to the agrarian crisis that many parts of India find themselves in. And finally, it will spread the tendency to default on such loans, a practice that will work against the goal of financial inclusion.

 

According to the National Sample Survey [59th Round, 2004-05], 51.4 percent or just over half of farmer households in the country did not access credit, either from institutional or non-institutional sources. Further, despite the vast network of bank branches, only 27 percent of total farm households had any loans from formal sources (of which one-third also borrow from informal sources). Among the marginal farmer category, as many as 80 percent did not have any borrowing from formal sources.

 

Therefore, the loan waiver, as designed, will benefit only the upper quartile of farmers. As per the announcement, those farmers whose bank loans were overdue on December 31, 2007, would get a waiver, irrespective of the amount.

 

Let us consider a hypothetical situation: A big grape farmer in Nasik who had a bumper crop but was politically aware, and therefore did not repay his loan, will get a waiver of Rupees 100,000 ($2,500 @ $1 = Rs 40). But a poor rain-dependant farmer in Vidarbha who has sold his less-than-normal yield of cotton to the state monopoly cotton federation, at a lower than market price, will be deemed to have repaid his Rs 15,000 loan ($375) from the proceeds that he has yet to receive, and will not get the waiver.  

 

That this is a pro big farmer loan waiver can be seen by post-budget announcements. The Reserve Bank of India has issued a clarification that not only crop loans but also term loans for tractors, poultry farms etc. will be covered by the waiver. The Bharatiya Janata Party, the main opposition party in Parliament, has taken up the cause of the farmers who have been left out. And to minimize backlash from those who did not get the waiver, Chief Minister Y. S. Rajasekhara Reddy of Andhra Pradesh, where the Congress Party is in power, has declared a 10 percent bonus payment to all farmers who sell their produce through regulated market yards; unfortunately, these are also the larger farmers.
  
Apart from the gross inequity in the name of small farmers, the loan waiver is particularly inept as it completely fails to address the underlying causes of the agrarian crisis in India, among them:

 

1. Dwindling size of land holdings;

 

2. Low percentage of irrigation, even protective irrigation; and where there was irrigation, tapering yields due to long years of mis-fertilization and increasing level of pesticide resistance.

 

3. No measures for coping with recurrent drought in rain fed areas, no significant varietal improvements, nor any agricultural guidance to farmers.

4.  Increases in input costs, coupled with lower relative prices for produce, and price fluctuation have meant that agriculture is not very profitable even for commercial farmers. Small farmers, with imputed wages for family labor, usually fail to break even.

 

The same Rs 60,000 crore could have been used to drought-proof 60 million hectares (148.2 mn acres) of dryland at a cost Rs 10000 per ha, which would permanently secured the livelihoods of at least 3 crore (30 mn) of our poorer  farmers in rain fed areas.  There are dozens of successful examples of the rehabilitation of natural watersheds and traditional water storage structures, carried out by both government agencies and by non-governmental organizations. Part of the funds could also be used to rehabilitate the dilapidated canal irrigation systems, conditional on the states switching to participatory irrigation management (PIM).

 

Even if one were to accept that the loan waiver was aimed at gaining electoral advantage, it could have been done much more equitably and would have fetched more votes.

 

 

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Vijay Mahajan is chairman of BASIX, a livelihood promotion institution, which pioneered sustainable microfinance in India. He is on the high-powered Committee on Financial Sector Reforms and was also a member of the Committee on Financial Inclusion.