Recently in an interview, Prime Minister Narendra Modi called farm loan waivers as “lollipops”. He said that this will not resolve the problems looming agricultural sector. The Prime Minister also pointed out to the loan waiver scheme in Karnataka and said that it has proven to be a mirage. This came after Congress President Rahul Gandhi said that he will give sleepless nights to the Prime Minister until all farm loans are waived. It becomes important for us to look into the effectiveness and consequences of these waivers which are being offered. While proponents of waivers point out to the benefits in the short-run, critics discuss the long-run hazards.
There are certain long-run moral hazards which have macro-economic consequences. It induces a culture of non-repayment among people irrespective of their economic condition. It encourages people to default expecting the government to waive their debts. Past experiences also suggest that farm loan waivers have failed to meet its desired objectives. The CAG report said that there were serious lapses in the 2009 loan waiver scheme. “Overall, the performance audit revealed that in 22.32% of the 90,576 cases checked, there were lapses or errors, which raised serious concern about the implementation of the scheme,” the report said. It also pointed out that while several ineligible farmers were given a waiver while many deserving ones were left out. Commenting on the CAG report, the then Chairman of Commission of Agricultural Costs and Prices said that such schemes affect the repayment culture.
The Economic Survey 2016-17 discussed about the possible consequences of a farm loan waiver at an all India level. It assumed that the waiver will be based on the UP loan waiver model. The survey estimated the waiver to be worth Rs 2.7 lakh crore. The survey factored in aggregate effects of the waiver and stated that loan waivers could reduce the aggregate demand by Rs 1.1 lakh crore (0.7% of GDP) resulting a deflationary shock to the economy. The deflationary shock would have adverse consequences for economic growth which is gaining momentum and has more or less stabilised after demonetization and implementation of GST.
The RBI in its report of July 2018 discussed the impact of loan waivers on finances of the states. It cautioned against implementation of loan waiver schemes. The report clearly stated that “Farm productivity enhancement through debt waivers is unproven”. It also said that even though the 2009 debt waiver scheme reduced household debts, there is no improvement in investment and productivity of beneficiary households. The report further cautioned that even though loan waivers cleanse the balance sheets of the banks in the short run, it may disincentivise the banks from lending to agricultural sector in the long run.
Farm loan waiver schemes not only have adverse consequences in the long run, but also have certain adverse effects in the short period. Recently, in a written response to the Rajya Sabha, the government revealed that enrolment under the crop insurance scheme has decreased by 15 per cent. A closer examination reveals that the decline is steep in states like Maharashtra, Rajasthan, Karnataka and Uttar Pradesh where farm loan waivers were announced. Therefore, this is an indication that farm loan waivers dampen crop insurance enrolments.
The government expects the citizens to be honest and pay taxes diligently. It has to be noted that most of those who pay income taxes belong to urban middle-class. Why would any reasonable citizen be willing to pay taxes which would be used for populist measures which have no tangible benefits as suggested by several reports? Announcement and implementation of farm loan waiver schemes affects the government spending adversely, especially if its implementation spills over to several consecutive years. The government can either increase taxes or cut other expenditure to fund the waivers. Both will have adverse consequences to the economy. A cut in expenditure would mean a cut in capital expenditure since revenue expenditure cannot be altered much, which would mean capital formation would take a hit. If we do not create capacities in the long run, it would be highly not possible to achieve sustained economic growth. On the other hand, a rise in taxes to fund the waiver would mean a reduction in disposable income of the urban middle class, which would again affect the consumption negatively. Rise in taxes also have cascading effects which would adversely affect the agricultural sector itself.
Therefore, instead of coming up with such populist measures which promote bad economics, political parties and policy makers can probably focus on reducing the dependency of our farmers on monsoon by improving irrigation facilities, fixing certain loopholes in the crop insurance schemes and improving its efficacy, and provide a basic investment support to farmers, similar to Universal Basic Income (UBI), like the Rythu Bandhu scheme of the Telangana government. Providing basic investment support should also be supplemented by withdrawal of certain agricultural subsidies which in itself have a lot of leakages. As former CEA Arvind Subramanian said in an interview, one should not be surprised if political parties promise implementation of UBI in the upcoming elections since it has long-term economic advantages and is beneficial to farmers as well.
Statements from the Prime Minister and his government indicate that the government, at least for the time being is focused on maintaining fiscal prudence and will not be resorting to populist schemes which are economically not feasible and are bad. One should hope that this election is not be a contest between two sides offering policies which are bad in economics and expect that economic prudence and realism takes precedence over populism.
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