Two separate decisions on farm loan waivers could have a domino effect

Chairing his first cabinet meeting after taking over the reins in Uttar Pradesh, Chief Minister Yogi Adityanath approved a write-off on outstanding farmer loans of up to ₹1 lakh taken before March 31, 2016. The State cabinet also decided to waive loans worth ₹6,000 crore extended to small and marginal farmers that had turned into non-performing assets. Together, this package, aimed at fulfilling the Bharatiya Janata Party’s election promise, will cost the exchequer about ₹36,000 crore. There was no mention of a bigger plan to ramp up the farm sector, in which U.P. invested just 2.3% of total expenditure in 2016-17 — one of the lowest rates across major States. A little earlier, the Madras High Court ordered the Tamil Nadu government to extend a similar farm loan waiver scheme for small farmers (with land holdings of up to 5 acres) and marginal farmers (who own up to 2.5 acres) to all farmers. Officials have even been forbidden from trying to recover loans where repayments have slipped. The State, which had already doled out ₹5,780 crore on this front, would need nearly ₹2,000 crore more to comply with the court’s order. This is a worrying trend for a country that wants to double agricultural incomes by 2022. Not only could it trigger a countrywide clamour for similar debt relief packages, political parties would also be more inclined to make such grand promises ahead of future polls. This is a slippery slope with multiple unintended outcomes likely in the years to come.

The Madras High Court has clearly reached into the the domain of the executive. The risk is that this overreach could be cited in other courts to seek omnibus loan waivers. Opposition parties in U.P. have already criticised the cap of ₹1 lakh on farm loans that will attract relief. The timing of these drastic interventions is unusual as India had a good monsoon in the 2016-17 crop season, after two years of drought, and a bumper output is expected for all major crops barring sugarcane. Forgiving loan burdens is a powerful political gesture that glosses over the fact that governments have had little patience to make agriculture a sustainable economic activity with efficient linkages to formal markets, be it for credit or for supply chains from farm gate to fork. FDI of up to 100% was allowed in food retail trading but investments are stuck over the reluctance to allow a small proportion of non-food sales. Writing off loans as a blanket policy, without scrutiny and restructuring attempts creates a moral hazard for borrowers, who will have no incentive to stick to credit discipline. Frequent write-offs will prod banks to invest in alternatives such as the Rural Infrastructure Development Fund instead of reaching out to individual farmers to meet their agricultural lending targets. In which case, usurious local moneylenders could have a field day.