Farm Distress

Will farm loan waivers hurt the finances of Tamil Nadu and Uttar Pradesh?

While officials say waivers could jeopardise allocation for other key sectors, farmer unions and economists feel it is a necessity given the farming crisis.

Developments in three states over the past week have brought the debate on the waiver of farm loans back under the political spotlight.

In Uttar Pradesh, the newly-elected Bharatiya Janata Party government under Chief Minister Adityanath announced on Wednesday that it would write-off crop loans of up to Rs 1 lakh for about 21.6 million small and marginal farmers.

In Tamil Nadu, on April 4, the Madras High Court directed the state government to waive all farm loans accessed through cooperative banks, irrespective of the size of the farmer’s landholdings. The government had waived such loans of small and marginal farmers last August, but had left out large farmers as a matter of policy. The court took the view that this classification was arbitrary in the context of loans, and wanted the big farmers to get the write-off benefits too.

This court order will put an additional burden of Rs 1980.33 crores on the state exchequer. Tamil Nadu had only recently released drought relief of about Rs 2,300 crores to farmers, crediting the amount directly into their bank accounts.

In Maharashtra, the Devendra Fadnavis government said on April 5 that it was studying the Uttar Pradesh model to see if a similar loan waiver scheme was possible in the state, after the Opposition said it would continue to hold agitations till farmers got a reprieve.

While the farming community looks at loan waivers as a necessary short-term measure to tide over the crisis caused by climatic conditions such as monsoon failure, officials see such schemes as a big burden on state finances. In states like Tamil Nadu, where the state debt situation is already precarious, loan waivers may affect allocations to key schemes in other sectors, such as education and health.

Reserve Bank of India Governor Urjit Patel on Thursday expressed his displeasure at the spate of loan waiver announcements in different states.

He said:

“I think it undermines an honest credit culture. It impacts credit discipline. It impacts incentives for future borrowers to repay. In other words, waivers engender a moral hazard. If on account of this overall government borrowing goes up, yields on government bonds also get impacted. Thereafter, it can also lead to crowding of the private borrowers as higher government borrowing can lead to increasing cost of borrowing for others.” 

However, development economists feel that as long as strong systemic changes are ushered in through which the cost of cultivation is reduced and the price for farm produce is increased, the cycle of farm loan waivers would be inevitable.

The Tamil Nadu problem

Tamil Nadu’s situation is worrying. Both the southwest and the northeast monsoons failed in the state last year. Despite the Supreme Court orders, Karnataka refused to release Tamil Nadu’s share of Cauvery water. This led to a complete halt in agriculture activity in the state between September and December, forcing the government to declare a state-wide drought in January.

Farmers from Tamil Nadu protest in New Delhi against the Centre's failure to provide drought-hit farmers with relief. (Photo credit: HT).
Farmers from Tamil Nadu protest in New Delhi against the Centre's failure to provide drought-hit farmers with relief. (Photo credit: HT).

Tamil Nadu had already given farmers a breather in August. After she won the Assembly elections in May, former Chief Minister Jayalalithaa announced that all short, medium and long-term farm loans of small and marginal farmers from state cooperative banks would be written off. These loans were those accessed by farmers before March 31, 2016. The total cost to the government was Rs 5,780 crores.

The classification of farmers who received the write-off was significant. Small and marginal farmers are those who hold less than five acres of land. They constitute 92% of all farmers in Tamil Nadu. To fulfill the High Court’s direction and waive the loans of the remaining 8% comprising medium and large farmers (though not all of them would have taken loans from cooperative banks), who hold more than five acres of land, the government will have to shell out an additional Rs 1,680 crores.

Speaking to this reporter on condition of anonymity, an official of the rank of principal secretary in Tamil Nadu explained why this was problematic.

“The ratio of small and marginal farmers to the rest is roughly 92:8,” the official said. “But, the amount of loan accessed by medium and large farmers, who constitute just 8% of the farmers population, is almost 30% of the total loan accessed by the rest of the 92%. This is why, the policy makes a differentiation between small and large farmers. The latter have better ability to take loans and absorb debt shocks.”

The April 5 order also goes against the High Court’s own directions in 2008, when it upheld the classification of farmers based on the size of land holdings. In that case, AK Ganguly, who was then the chief justice, made this observation while dismissing a petition by a big farmer seeking a loan waiver:

“The Court, after anxious consideration of the submission by the petitioner on discrimination, is of the view that the submission even though appear to be attractive and may be of some importance, still it is difficult for this Court to entertain the same for the purpose of interfering with the implementation of the policy in question.

“This Court cannot be oblivious of the fact that there does exist a distinction between farmers owning five acres of land and farmers owning land more than five acres. Such a distinction is not per se discriminatory. This Court cannot hold that all farmers irrespective of the area of land held by them must be given the benefit of the waiver scheme.

“No one has a right to get a waiver of the loan availed by him. Therefore, a line has to be drawn while framing a policy. Unless that line of distinction shocks the conscience of the Court that it must refrain from issuing judicial interdict. Therefore, the basic question is one of reasonableness. If the line of distinction is prima facie reasonable, which is so in the case of the present policy, the Court must exercise its judicial restraint.”

The principal secretary pointed out that over and above the loan waiver of Rs 5,780 crores in August, the state government also released drought relief of about Rs 2,300 crores in January, which was distributed as a direct benefit to the farmers. The High Court’s order will strain the state finances, which is already in tatters with an estimated debt of Rs 3,14,366 crores for 2017-’18.

“This year, we will have to implement the Seventh Pay Commission as well,” the official said.

Even a minor burden like an additional farm waiver could hurt the exchequer if the Union government does not help.

“The Centre has given only about Rs 1,600 crores as drought relief while we asked for over Rs 30,000 crores,” said the official.

State government officials fear that the additional burden on the state to take over farm loans would end up affecting allocations to schemes in other key sectors like health and education.

Credit: PTI
Credit: PTI

Cooperative banks, on the other hand, say that their duty was to implement government orders. A cooperative bank official in Salem said that he was confident that the state government would reimburse the loans they had to be waived following the High Court’s order.

“It is only if they ask us to bear the burden that we would be in trouble,” the official said.

The banks feel that lending for the next season would be difficult if the government did not release the reimbursements quickly. “This will only affect the farmers again,” said the bank official.

A few farmers’ unions are also not convinced with the logic of the High Court’s order setting aside distinctions based on land holdings.

K Balakrishnan, president of the Tamil Nadu Vivasayigal Sangam, said hardly 30% of the 60 lakh farmers in Tamil Nadu access institutional credit.

“A large section of those who access credit from banks are large farmers,” he claimed. He added that most small and marginal farmers took private loans as the process of obtaining institutional credit was cumbersome. “In such a situation, getting rid of the classification would only affect the few small farmers who access bank loans.”

Balakrishnan said that if the high court order was accepted, large farmers would start asking for other subsidies exclusively created for small farmers. “The state has to prioritise the weaker sections,” he said.

The Uttar Pradesh model

In Uttar Pradesh, the government said that it would write off crop loans of up to Rs 1 lakh for about 21.5 million small and marginal farmers. This would cost the government Rs 39,359 crores.

The government wants to finance this waiver by issuing farmers relief bonds through one of the state organisations. Issuing of bonds to finance government schemes is an age-old practice. The state-backed bonds act like a surety, which the government repays at a later date. They are primarily used for infrastructure projects, upon completion of which the government will get a sustained revenue that could be used to pay off the borrowings.

However, in the case of farm loan waivers, there will not be any revenue from the scheme. Normally, such a large waiver scheme would negatively affect the state budget deficit levels, endangering its credibility in the eyes of rating agencies and making it tougher to obtain loans in the future. But government bonds are not factored in as debts in the state budget and thereby do not affect the fiscal deficit significantly. At present, Uttar Pradesh’s estimated fiscal deficit is Rs 41,400 crores.

A senior Uttar Pradesh official said that unlike Tamil Nadu, where only loans obtained from state cooperative banks are being written off, Uttar Pradesh will waive loans of up to Rs 1 lakh issued by public sector banks as well. As a matter of policy, nationalised banks do not write-off loans. The state will have to repay them on behalf of the farmer.

Asked if the Madras High Court order deeming the classification of farmers according to their land holdings arbitrary would affect Uttar Pradesh, the official said that the government has not considered the problem yet. “Unless someone from the state goes to the Allahabad High Court and gets a similar order, we don’t see a problem,” the official added.

Short-term measure

Development economists feel farm loan waivers are short-term measures, but are nevertheless necessary in times of severe drought or floods. However, they said that there was a deeper systemic problem that has pushed farmers strongly into the debt cycle.

K Nagaraj, former economist at the Madras Institute of Development Studies, said two defining trends have made farming uneconomical in the last few decades.

He said the price for farm produce has stagnated over the years. On the other hand, cost of agricultural inputs have soared. This has drastically pushed up the cost of production.

For example, after the Union government began decontrolling fertilisers in 2010, the cost of a few fertilisers have gone up over 1400%. Whereas the Minimum Support Price for paddy has gone up a mere Rs 470 or 68% in the same period.

“Unless the government reduces cost of production and increases agriculture profit, farmers will remain caught in the debt cycle,” said Nagaraj.

However, he said this did not mean that the waiver of farm loans was wrong. Rather, it become even more important in a situation where a debt-ridden farmer is debilitated by climatic conditions.

Nagaraj said that he did not buy the argument that writing off farm loans would adversely affect the fiscal situation in states. “The government doles out lakhs of crores of tax subsidies for the corporate sector but does not see that as a burden,” he pointed out.

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