Poll promises: Crop loan waiver to cost Rs 8,000 crore

With agriculture contributing over 27 per cent to Uttar Pradesh’s net state domestic product, the incoming Bharatiya Janata Party government’s promise to waive loans taken by small and marginal farmers, an assurance Prime Minister Narendra Modi repeated several times during his campaign, looks impressive on paper and could go a long way in reducing farm indebtedness. But experts feel a waiver of crop loans can have a negative impact on credit quality in farming.

Also, state governments can only waive crop loans taken from cooperative banks and primary agricultural cooperative societies (PACS), which extend a small part of total farm loans. Most farmers take loans from nationalised banks and a big waiver can only be done by the Centre. 

The share of farm loans taken from state-level financial institutions is barely a third of the total. Over 70 per cent of all farm credit in a financial year is disbursed by scheduled commercial banks. In Uttar Pradesh, of the estimated Rs 75,000 crore farm loans outstanding two years ago, just around Rs 8,000 crore has been lent by state cooperatives and PACS. This number includes loans availed by all categories of farmers and not just small and marginal. The outgoing Samajwadi Party government, too, had in 2012 announced a waiver of crop loans up to Rs 50,000 taken from state cooperative banks. The waiver cost the Uttar Pradesh exchequer around Rs 1,650 crore per year and was roundly criticised by Opposition parties on the grounds that it excluded scheduled commercial banks and had too many conditions that rendered it ineffective.

Around 80 per cent of all land holdings in India — which is expected to be roughly the same for UP as well — according to government data, are with small and marginal farmers — those who own less than two hectares. These farmers own almost 40 per cent of the total arable land in the state.

“Waiver of crop loans for any category of farmers is not healthy as it vitiates the lending culture and is not good for the banking system,” said Mahendra Dev, director of the Mumbai-based Indira Gandhi Institute of Developmental Research (IGIDR). He said if the waiver only covered loans taken from cooperative banks, it was all the more problematic because the financial health of cooperative banks was in any case not very good.