Archive for April, 2008


Effects of Loan-waiver

Before the budget

With a sorry 2.6% growth in the first year of the 11th Plan (compared to 3.8% in 2006-07) and a declining share in the GDP-24% in 2001-02 to 17.5% in 2007-08 which was attributed to slackening growth of rabi crops-the agricultural sector is crying out for long-term answers to economic viability.
There has been a loss of dynamism in the agriculture and allied sectors in recent years, pointing to poor credit reach, gradual degradation of natural resources through overuse and inept use of fertilisers, low public investment in agriculture and inability to attract sufficient private investment because of lower/unattractive returns, poor use of irrigation potential, an extension system in shambles and a delayed start to long-term productivity-boosting schemes.

Ironically, while accepting that production, yield and irrigated area added, have all stagnated or come down for key crops-paddy, wheat, pulses, oilseeds, even sugarcane- the government harps on one mantra to boost production: announce minimum support price (MSP) for these well before the sowing season. Indications, thankfully, are that the government will finally move into this regime as a matter of long-term policy. Presumably, this will also mean aligning support prices close to market prices.

Farmer Friendly Decisions

  1. Complete waiver of loans for small and marginal farmers holding upto 2 hectares of land. Agricultural loans restructured by banks through special packages. All such loans will also be eligible for waiver under the scheme. Implementation of loan waiver scheme is scheduled to be completed by June 30, 2008. Farmers will also be eligible for fresh loans. Govt plans to allocate 60,000 crore for this scheme
  2. New scheme of debt-waiver and debt relief for farmers.
  3. All agriculture loans disbursed by PSU banks, co-operatives till March 2007 waiting recovery to be covered under scheme
  4. One-time settlement scheme for “all other” farmers

Implications of the budget decisions

If you are a farmer that has less than 2 hectares of land and have taken a loan, government has announced that it will waive your loan. The Government of India will compensate the bank.

How does the relief to the farmer work out? How will the Rs 60,000 crore be provided for? What does providing liquidity to the banks mean ?
How the government explains it is that this is money out of the banking system. Some of it is already overdue, already non-performing assets.
So banks are already unsure as to how much of this Rs 60,000 crore would come back to them. It was decided to write off the loans and agree to provide liquidity of the equivalent amount to the banks. The banks have welcomed this arrangement, because they will have fresh liquidity to lend.
Everyone claims that waiving the loans would be a huge relief for farmers who are having a tough time with rising production cost and dwindling profit or growing loss.

What does the government aim to achieve by providing the loan waiver?
The 60,000 crore loan waiver will apparently touch crores of smll farmers in the remotest corners of our country does two things. One, it provides relief on 4 cr homes. Multiply that by 5.5, the size of the number of people in an average Indian home (as per 2001 census) and you have a total of 22 crore people touched directly by the largesee. That’s a lot of consumers.
Two, we need to understand a basic fact. For the farm homes in question, a rupee saved as an outgo on interest and indeed principal, is a rupee earned. This means that both interest burden and loan amount are off. So four cr farmers and their 18 cr dependents will now be rid of their debt burden from the formal sector. They still have the burden of the principal and interest due to the money lenders. Nevertheless, burden removed is a burden removed.
The moneylender’s cash flows are going be touched that much more. The small farmer will now pay the interest he owes that much more promptly. And if he runs out of money he still has an option of going to his friendly neighborhood bank and reapply for a loan.
The question arises- Will this loan waiver bring about an anticipated change in consumption? Engneering consumption artificially is a process that takes years altogether.

But will this step save the farmers of India? Will it revive agriculture in India?
This step is only going to put farmers and agriculture sector as a whole in deep trouble in coming years. We need a long term solution than a short term patch up to revive agriculture.
The fact that fresh loanees have not only plateaued, but actually nosedived in 2008-09 in a sector defined by farm distress have been hided. Indications are that the impending relief package will address this. Despite the diagnosis, the government is keener on populist initiatives such as loan waivers and rescheduling rather than a long-term solution to volatile fluctuations in crop prices that increased farmer suicides.
Admittedly, even a 2% cess would only come up with a modicum (Rs 8,000 crore-odd) of what’s really needed, but the government dodges any other long-term measure on the farm distress relief front.
It is a known fact that agricultural sector in India is suffering because agriculture no longer is a profitable business. As long as it is not a profitable business, people who are already into it try to get out of it and also it won’t attract more people into it.
Who wants to invest or waste time on something that won’t give them back their investment?
Instead of waiving Rs.60,000 crores of loan, if the government has used this money to increase the procurement price of agricultural products by say 3 times the present price the farmers who cultivate it would have made some profit and they will also be motivated to continue agriculture.
The waiver is meant for farmers owning less than 2 hectares of land with borrowings from commercial or rural regional banks and cooperatives. But half the farmers falling in this category (49.7%) have taken loans from local moneylenders. The scheme would provide no respite to this half of the indebted farmers.
The Budget makes not even a passing reference to the massive produce price fluctuation problems being faced by the farmer.



April 2008
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