Waiver danger: Repeated agricultural loan bailouts must be avoided

Maharashtra's new farm loan waiver may fulfil a poll promise, but repeated debt relief risks weakening credit discipline and straining the state's fiscal balance

When the Maharashtra state Budget was tabled in the Legislative Assembly last week, the government followed through on one of its poll promises. While normally this would warrant congratulations all around, on this occasion there is a complication: The poll promise in question is the offer of waiving agricultural loans. The Punyashlok Ahilyadevi Holkar Farmers Loan Waiver Scheme, as it will be called, is hardly unique in the state’s history. In fact, it is the third farm-loan waiver that Maharashtra governments have introduced in the past decade. Under the terms of the scheme, eligible farmers with overdue crop loans on September 30, 2025, will have their debt up to ₹2 lakh waived. In addition, those who have made regular loan repayments will nevertheless receive payments of up to ₹50,000. Although Maharashtra’s debt as a percentage of gross state domestic product (GSDP) is about 19 per cent and lower than the national average, the state must desist from such populist measures. It also has a popular cash-distribution scheme for women. 

India has a great deal of history of farm-loan waivers. They massively worsen the fiscal balance while not appreciably increasing agricultural welfare in the longer term. They also have problems in terms of moral hazard — there is little incentive to repay if farmers or any other interest group can, instead, lobby the government for a loan waiver. In this case, the state administration clearly thinks it is addressing the moral hazard essentially by making payments also to those who have repaid. But unless such repayments are complete, this will not solve the problem. And it worsens the other issue associated with farm-loan waivers, which is the burden it places on the exchequer. As Maharashtra’s own history shows, the question is not just moral hazard for individuals — it is moral hazard for the entire sector, incentivising debt-fuelled expansion when there is every assumption that the risk will be subsequently socialised through government support. Given the nature of India’s political economy, it is likely that such demands will also be made in other states. 

The Reserve Bank of India, as the banking regulator, has warned precisely of this: Frequent farm-loan waivers driven by the political cycle have severely undermined the credit culture in the agricultural sector. In fact, it tends to affect the same group the government is trying to help. Banks and other financial institutions will be reluctant to lend to farmers because they have a clear incentive to default. Thus, it could end up affecting the flow of credit to farmers. The political links were made explicit by the RBI when it noted in 2019 that eight of the 10 such schemes declared over the previous five-year period had come within 90 days of elections. 

The final point that must be considered is that such schemes ultimately do not end up helping the most vulnerable farmers. At most they reach about half the eligible beneficiaries, often far fewer, and those are usually the most privileged section. The larger question is why agricultural reform that allows for direct income support is still off the table. As long as agricultural subsidies at the level of the Union government are distorted, state politics will continue to revolve around such fiscally irresponsible policies. Besides, it is worth asking to what extent the new scheme can address the underlying structural issues if previous waivers did not resolve the problem.