Mr Modi is right

PM deserves credit for resisting nationwide farm loan waiver

In an interview on New Year’s Day, Prime Minister Narendra Modi said that, while any state government was free to institute a farm loan waiver, his own government was focused on “empowering” farmers. The prime minister pointed out that, in the past too, many rounds of farm loan waivers had occurred, but farmers continued to get into troubling amounts of debt — indicating that a structural problem existed and it was yet to be solved. The prime minister is also quite correct in saying that small farmers do not get any benefit from such waivers because they mostly take loans from moneylenders. He deserves full credit for resisting populist pressure from within his own party and from the Opposition to conduct a national-level farm loan waiver. Multiple state governments, including Bharatiya Janata Party-ruled Uttar Pradesh, have waived agricultural loans. Some, like in Tamil Nadu, did so during the course of their terms; others, like in UP and in the three Hindi-speaking states to which the elections have just concluded, did so following an assembly election in which waivers were promised during the campaign. Thus, the pressure on Mr Modi is considerable, and it is a relief that he is standing firm against a dangerous policy, which he correctly described as a political stunt.

 
Farm loan waivers are certainly no solution to the systemic problems in India’s agricultural sector, as the prime minister has pointed out. Indeed, it is quite likely that they make things quite worse. They carry with them the problem of moral hazard — creating a system in which farmers take more loans than they need or can afford, on the assumption that if the loans turn bad then they will at some point be waived under political pressure. This causes the breakdown of the entire agricultural credit system. When state governments fail to compensate banks on time for their losses on loans that have been declared to be waived, banks become stressed, and stop lending — meaning that those farmers who depend on credit run into trouble. Finally, the state governments that pay the banks discover that they have run out of money for other essential activity, such as investment and capital formation. If they seek to spend the money anyway, they build up problematic amounts of debt — their fiscal deficits, too, might run up against the cap set by past finance commissions, causing a crisis of federalism.

 
Thus, there are multiple ways in which, as Mr Modi argues, loan waivers are not the answer. He pointed out that much of the money that has been spent over his term in office on improvements in irrigation could instead have been spent on loan waivers to greater political profit. But that would not have addressed farm insecurity in any meaningful manner. The need of the day is to ensure that average incomes in the farming sector are higher, and the cost of inputs that require borrowing become more affordable. One way to ensure this sustained prosperity is the creation of solid non-farm jobs that can absorb excess personnel in agriculture, who otherwise drive down productivity in the sector. This should be the focus of the government, not hopeless farm loan waivers.