DMPQ: Farm loan waiver has become a populist tool. Do you think loan waiver is the ultimate solution? (Economy)

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After the recent Assembly elections, the new governments in Rajasthan, Madhya Pradesh and Chhattisgarh announced farm loan waivers. According to SBI Research, around ₹70,000 crore will be spent on farm debt waivers till May 2019.  Rising costs, drop in income and increasing incidence of indebtedness among small and marginal farmers manifested in a spate of suicides over the years lead to implementation of farm loan waiver. But it is certainly

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not a ultimate solution because:
  • Study shows that farm loan waiver is not the answer.
  • There are evidences on the ineffectiveness of the agricultural debt waiver and debt relief scheme.
  • Loan waiver scheme did not have any positive impacts on household savings, credit uptake from banks or investments.
  • Economic theory suggest that waiving debts via such a scheme will lead to debt overhang.
  • A farm loan waiver benefit only those farmers who have access to formal credit which is just 30%.
  • Farm loan waiver adversely impacts the credit culture and the behaviour of borrowers.
  • A NITI Aayog study had also highlighted the fact that in some States, about three-fourths of the farm loans were being used for consumption instead of meeting agricultural needs.

 

 

 

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