In the run-up to the Gujarat assembly elections, Chief Minister Vijay Rupani on October 16 announced that his government would offer interest free-loans to farmers who borrow up to Rs 3 lakh and pay the amount back on time. Many Opposition politics criticised this as a populist measure, aimed at garnering votes for Rupani’s Bharatiya Janata Party.

Reducing the interest burden of farmers in times of rural distress can often prove beneficial. But agricultural economists say that this is not the best way to help farmers. Loans from the formal banking sector are most often cornered by rich farmers, studies show. As a result, cuts in the interest rates on such borrowings disproportionately benefit the affuent. Besides, if the money spent to reduce rates comes at the cost of long-term investment in infrastructure that could truly make the agriculture sector sustainable, the measure could actually be harmful.

A glance at Gujarat’s own agriculture spending shows show this is playing out in the state.

Who benefits from loans?

When banks offer short-term agriculture loans, they come with an interest rate of 9%. But since 2006-’07, central and state governments have stepped in to subsidise these loans. In 2017-’18, for instance, the Union government has committed more than Rs 20,000 crore funds as a subsidy for banks so that farmers across the country will pay only 4% on their borrowings.

Topping up the Centre’s subsidy, the Gujarat government had for 2017-’18 offered loans for as little as 1% to farmers, dairy farmers, fishermen and cooperatives run by them. The BJP’s decision to bear the entire interest burden will cost the state roughly Rs 700 crore in the current financial year, the state estimates.

In May, the State Level Bankers’ Committee of Gujarat reported that the banks had only met only 80% of their target for loans to farmers. Of the total loans given in 2016-’17 by formal banking channels in Gujarat, 16.73% went to farmers and only 5.14% of the total lending by banking institutions was to small and marginal farmers. Less than a third of the small and marginal farmers holding below 2 hectares took loans from the formal banking sector. But more than 50% of the medium and large farmers got loans from banks.

About 60% of the short-term loaned out amount goes to the small and marginal farmers in Gujarat who constitute more than 85% of the landholding farmers in the state.

Data from the Gujarat government’ shows that while Gujarat has shown better growth in loan disbursement to the farming sector than the country average, the most consistent and higher growth was recorded between 2004-’07 when it hovered above 30% on average and since then it has ranged between 17%-18% growth rate.

Gujarat’s investment in agriculture and irrigation

Even as Gujarat is offering its farmers short-term relief, it is doing less to build long-term capacity in the agricultural sector. In nominal terms, as a percentage of its total expenditure, Gujarat’s expenditure on agriculture and irrigation has fallen between 2013-’14 and 2017-’18. As a percentage of the state’s income at current prices also the expenditure on these two heads fell for 2013-’14 and 2015-’16 – the last year for which data is available.

Each year during that period, the state failed to spend the amount it had budgeted for irrigation and agriculture. The exception was in 2016-’17 on one account, when revenue expenditure on irrigation marginally was higher than planned. The rest of the expenditures on irrigation and agriculture were lower even in this year. But figures for actual expenditure in 2016-’17 are likely to be revised downward by the time the final accounts are put in public domain in 2018-’19.

In 2016-’17, Gujarat’s expenditure on agriculture and irrigation was Rs 800 crore less than budgeted. This is Rs 100 crore higher than what the government estimates it will have to incur in the zero-interest loans. Over the four fiscal years 2014-2017, the government has spent Rs 6,700 crore less than planned on irrigation and agriculture, falling short on both revenue and capital expenditures. Capital expenditure is used to build new assets and investments on ground in the sectors. Revenue expenditure goes towards maintaining this infrastructure – such as canal systems. Between 2014-2017, Gujarat spent Rs 3,381 crore less than that budgeted on building new canals and servicing these irrigation systems.