India’s farm loan waiver bill could rise to Rs 3.1 lakh crore. Is it affordable?

As demands for farm loan waivers grow across Punjab, Haryana, Tamil Nadu, Gujarat, Madhya Pradesh, and Karnataka – after Uttar Pradesh and Maharashtra wrote off loans worth Rs 36,359 crore and Rs 30,000 crore, respectively – India faces a cumulative loan waiver of Rs 3.1 lakh crore ($49.1 billion), or 2.6% of the country’s gross domestic product in 2016-17.

A waiver of this scale could pay for the 2017 rural roads budget 16 times over or pay for building 4,43,000 warehouses, or increase India’s irrigation potential by 55% more than the achievements of the last 60 years.

While such waivers could provide succour to 32.8 million indebted farmers, an IndiaSpend analysis of the impact of previous farm loan waivers indicates such bailouts are band-aids of uncertain efficacy and do not address a deeper malaise gripping India’s agrarian economy.

Over nine years to March 2017, the central and state governments waived Rs 88,988 crore ($13.9 billion) in loans to 48.6 million farmers. The nationwide Rs 52,000 crore ($11.3 billion at Rs 45.99 per dollar) loan waiver announced by the United Progressive Alliance government in 2008 occupies the bulk of this figure.

The waivers were primarily meant to discourage suicide by farmers, apparently caused by widespread indebtedness. However, our analysis shows this had little or no impact on suicide rates, probably because on average 32.5%, or 79.38 million, small and marginal farmers across India (with farm holdings of less than 1-2 hectares) rely on informal sources of credit.

Meanwhile, loan waivers have led to a rise in the non-performing assets of banks, especially public-sector banks, and are likely to have a significant bearing on the state and national fiscal deficits. In 2013, agricultural non performing assets accounted for about 41.8% of “priority sector” – which also comprises micro and small enterprises, affordable housing, and student loans – NPAs in public and private banks, up from 25% in 2009, according to a 2015 study published in the International Journal of Science and Research.

For example, Maharashtra’s Rs 30,000 crore farm loan waiver for small and marginal farmers will raise the state’s fiscal deficit to 2.71%, which is three-fourths higher than the budgeted deficit of 1.53% of the gross state domestic product, or GSDP, for the current financial year, according to this 2017 report by ratings agency India Ratings and Research. Uttar Pradesh’s Rs 36,359 crore farm loan waiver is 2.6% of its GSDP, the agency estimated in April, according to Mint. The 14th Finance Commission states that fiscal deficits should not exceed 3% of state budgets.

Two-thirds of small and marginal farmers will not benefit from loan waivers

About 85% of all operational farm holdings in India are of less than two hectares, as IndiaSpend reported on June 8. Since 1951, the per capita availability of land has declined 70%, from 0.5 hectares to 0.15 hectares in 2011, and is likely to decline further, according to the latest data from the agriculture ministry.

Owners of these shrinking farms find it difficult to use modern machinery and are often too poor to afford farm equipment. Manual labour increases costs, and land size and output further limits access to loans and institutional credit.

On average, a third of Indian small and marginal farmers have access to institutional credit. This means no more than 10.6 million of 32.8 million small and marginal farmers in the eight states demanding loan waivers could benefit from debts being written off.

The other 22.1 million farmers, or 67.3% of the total, depend on moneylenders and relatives for borrowings, according to the 2011 agricultural census and the National Sample Survey Office’s 2013 situation assessment survey of farm households, the latest available data.

Previous loan waivers did not stop farmer suicides

In 2007, before the UPA’s loan waiver for 30 million farmers across 18 states – Andhra Pradesh, Bihar, Chhattisgarh, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Orissa, Rajasthan, Tamil Nadu, Uttar Pradesh, Uttarakhand, West Bengal – 16,379 Indian farmers committed suicide, according to the National Crime Records Bureau.

A quarter of these suicides (4,238) were reported from Maharashtra. In 2009, the year after the loan waiver was announced, the state government promised an additional waiver of Rs 6,208 crore. This led to a drop in farm suicides in India’s richest state by GDP. But in 2010, suicides rose again, by 6.2%. By 2015, seven years after the Centre’s bailout, Maharashtra recorded 4,291 suicides, its highest ever, accounting for 34% of such deaths nationwide, according to the latest available data.

Telangana reported a similar trend. In 2014, when Telangana waived Rs 17,000 crore in loans to 3.6 million farmers, 1,347 farmers committed suicide in the newly formed state. in 2015, 1,400 suicides were reported.

Agricultural NPAs grew three-fold from 2009 to 2013

While loan waivers provide no more than temporary relief, they place a significant burden on public finance and the economy, and “engender a moral hazard”, Reserve Bank of India governor Urjit Patel cautioned on April 6, echoing the arguments of financial experts who believe such bailouts deter even capable farmers from honestly repaying their loans.

“Waivers undermine an honest credit culture…It leads to crowding-out of private borrowers as high government borrowing tend to [impose] an increasing cost of borrowing for others,” the RBI governor said, calling for a consensus among states on loan waiver promises. “Otherwise sub-sovereign fiscal challenges in this context could eventually affect the national balance sheet.”

After India’s first major farm loan waiver of Rs 10,000 crore in 1990 – announced by the Janata Party government led by VP Singh – it took almost nine years for the banks to recover, the Economic & Political Weekly reported in April 2008.

Since the 2008 farm loan waiver, agricultural NPAs rose three times, from Rs 7,149 crore ($1.2 billion) in 2009 to Rs 30,200 crore ($4.7 billion) in 2013, according to this study conducted in 2015.

These NPAs affect the credibility of lending institutions. Shares of banks fell 4% after Maharashtra announced its loan waiver, Business Standard reported on June 13, 2017. Further, with public sector banks accounting for the major share of farm credit – 52% in Maharashtra, followed by 32% from co-operative banks and 12% from private banks – the public sector banks are “more vulnerable”, according to the 2017 Kotak Institutional Equities report.

Agricultural credit grew 547% from 2004-05 to 2014-15

Indebtedness is a symptom and not the root cause of the farm crisis, according to a 2007 expert group report on agricultural indebtedness, chaired by the economist R Radhakrishna. The average farm household borrowing has not been “excessive”, the Radhakrishna report said. The factors contributing to the farm crisis are “stagnation in agriculture, increasing production and marketing risks, institutional vacuum and lack of alternative livelihood opportunities”, the report said.

More recently, others others have emphasised this point: it is clear loan waivers alone cannot solve India’s agrarian crisis.

The data reveal a more-than-necessary focus on agricultural credit, as other fundamental problems remain unaddressed.

Over a decade to 2014-15, as institutional credit in agriculture grew 547%, from Rs 1.25 lakh crore ($19.4 billion) to Rs 8.45 lakh crore ($131.4 billion), rural road construction – which increases access and boosts agricultural income and productive employment – grew 10.5%, according to this 2016 research paper.

Roughly 7% of India’s total grain output, 10% of seeds, and 25%-40% of fruits and vegetables – overall a third of farm harvest – is wasted every year because there is not enough storage and supply chain infrastructure, according to the 2015 paper published in the International Journal of Science and Research.

Irrigation, increasingly vital in an era of climate change, has failed Indian farming. No more than 47.6% of India’s farms are irrigated, as IndiaSpend reported on June 8, and the decadal growth in net irrigated area to 2010 was 0.3%, according to the ministry of agriculture.

These low investments eventually make farming expensive and prices volatile. For example, despite a good harvest, tur (pigeon pea), an important pulse, today fetches 63% less than it did in December 2015 (Rs 3,800-Rs 4,000 per quintal compared with Rs 11,000 per quintal).

Since 2010, the cost of cultivating tur has risen by 78%.

To curb the impact of market fluctuations, this 2016 report by Chief Economic Adviser Arvind Subramanian recommended improving the “procurement capacity” – or money available to buy farm produce – of states, lifting export bans, raising stock limits – which is how much produce traders can hold – and including “risks and externalities” while framing the minimum support prices for the produce. For those commodities protected by the government’s minimum support price policy – including fruits and vegetables – the Radhakrishna committee recommended a price-risk mitigation fund, which would allow to hedge losses in market fluctuations.

These investments, as the agricultural economist M S Swaminathan pointed out in his tweet, require capital expenditure, which may now be hit by the recent decisions to waive farm loans. States are unlikely to get help from the Centre this time, as finance minister Arun Jaitley indicated on June 13, 2017.

“States which want to go in for these kind of schemes [farm loan waivers] will have to generate them from their own resources,” said Jaitley. “Beyond that the central government has nothing more to say.”

Tallying the numbers

The 2017-18 budget for rural road construction, under the Prime Minister’s Gram Sadak Yojana, is Rs 19,000 crore. We divided the total potential farm waiver of Rs 3.1 lakh crore by 19,000 = 16.31 times, rounded off to 16.

To arrive at the figure of 443,000 warehouses, we found that the average cost of one 10,000 sq ft warehouse is Rs 70 lakh (at the average rate of Rs 700 per sq ft). We divided the total potential farm waiver of Rs 3.1 lakh crore by Rs 70 lakh = Rs 4,43,000.

Since the first five-year-plan of 1951, Rs 2 lakh crore has been spent to create 109 million hectare of irrigation potential, according to this 2012 planning commission report. Irrigation potential is the area that can potentially be irrigated when it is fully utilised. From this, we found that Rs 1,835 crore can create an irrigation potential of 1 million hectare. We divided the total potential farm waiver of Rs 3.1 lakh crore by Rs 1,835 crore per hectare = 169 million hectare, which is 55% more than the 109 million hectare.

This article first appeared on Indiaspend, a data-driven public-interest journalism non-profit.