Opinion: Crop loans waivers and agrarian distress

Recently, in its first cabinet meeting on April 4, fulfilling its poll promise, the newly elected government of UP announced a Rs 30,729 crore scheme to waive crop loans up to Rs 1 lakh of small and marginal farmers in the state.

While the members of the ruling party have praised the “farm loan” waiver, the critics have called it a treachery with farmers by restricting it to crop loan only, contrary to poll promises.

Who it will help?

The critics point out that only a small number of farmers will be benefitted by this move. In this context, the following may be considered.

  1. Very few farmers actually take loans. There are around 2.30 crore farmers in UP, with the number of small and marginal farmers coming around 2.10 crore, but not all of them take loans. It can be seen in the number of Kisan Credit Cards (KCCs). The KCCs are a major instrument of taking loans by farmers. The KCCs issued till March, 2015 were around 41.32 lakh, covering only about 20% of farmers.
  2. Only crop loans are waived off. There are different types of agricultural loans – crop loans, loans against warehouse receipts, produce marketing loans, KCC-based loans, investment loans, etc. A crop loan is a loan given in connection with raising a crop, to be repaid in 18 months, while other loans such as investment loans are meant for direct agricultural and allied activities such as buying a tractor or deepening-boring of new wells etc. while, previous loan waivers like the “Agricultural Debt Waiver and Debt Relief Scheme – 2008” included both crop loans and investment loans under its purview, the present scheme is limited to crop loans alone. Therefore, it is expected to cover a smaller number of farmers, estimated to be around 86 lakh.
The larger picture

UP is an agriculturally significant state of India since it is the biggest producer of wheat, potatoes, sugarcane and milk in India, and the second largest producer of rice and grams.

More than 50% of the state’s population is engaged in agriculture.

While the decision is a welcome step, it is not going to ameliorate the agrarian distress. The farm sector in India is confronted by several challenges today.

  1. The scarce rains faced by farmers in recent years
  2. The costs of inputs rising
  3. Prices of outputs decreasing
  4. Climate change leading to vagaries of weather increasing risks of crop failure, etc.

In this scenario, farmer suicides have become a regular feature, while a significant section of farmers wants to quit agriculture, given a chance.

Any plan for the revival of agricultural sector requires a holistic approach, focussing on the structural problems haunting it.

From banking sector’s point of view, a farm loan waiver undermines an honest credit culture and impacts credit discipline. It reduces incentives for future borrowers to repay. In other words, it engenders moral hazard and also entails transfer from tax payers to borrowers.