Beyond waivers

Farm loan politics will be counter-productive

A group of 13 well-known economists have released a paper that contains a non-partisan strategy for India in an attempt to build a consensus around growth-promoting reform prior to the Lok Sabha elections scheduled for the first half of next year. Among the many recommendations on primary education, banking reforms, and export promotion lie some particularly important comments dealing with the politically sensitive agricultural sector. The paper recommends addressing the constraints on acquiring land through the use of technology and economic best practices, including land banks, auctions for price discovery, and a land registry accompanied by government-guaranteed land titles. Yet, the most controversial suggestion is that rural distress not be alleviated through loan waivers or even higher support prices but through cash transfers — in particular, through the sort of per-acre income subsidy that exists in many other parts of the world and is also, as it happens, compliant with existing rules at the World Trade Organization.

Such a system is indeed being tried in the southern state of Telangana and it appears was popular enough to be a major contributor to the landslide victory of the ruling Telangana Rashtra Samithi in the recent elections. Yet, in other parts of the country, such forms of income support are not being tried. Instead, it appears that farm loan waivers have become a standard part of the politician’s vote-winning arsenal across parties. The Congress, for example, promised Hindi heartland voters that the loan waiver process would begin within 10 days of its government taking office. An agricultural credit system simply cannot work when a loan waiver is apparently a political guarantee. While rural distress may well be a real and pressing problem, if money is to be spent to alleviate it then it is far better to use other systems, especially direct transfers. 

The effect of competitive loan waivers on state finances also needs careful consideration. Rajasthan, Chhattisgarh and Madhya Pradesh — the three states where the Congress won — have made efforts in the past years to bring down their state fiscal deficits as a proportion of gross state domestic product, or GSDP. They budget a fiscal deficit of around 3 per cent of GSDP for the ongoing financial year — a little higher in the case of Rajasthan, a little lower in the case of Chhattisgarh. But the amount promised to farmers would severely strain the fiscal mathematics. In Rajasthan, for example, Reserve Bank of India research in September had estimated that the cost of loan waivers would be Rs 219 billion, just a shade short of its capital expenditure of Rs 257 billion. This would be if only loans under Rs 100,000 per farmer were waived — half the eligible ticket size in Karnataka, another state which promised a loan waiver after the elections. Naturally, the higher the cap for eligible indebtedness, the greater the burden on the exchequer. Clearly, this is an unsustainable promise. There has also been a suggestion that the Election Commission asks political parties to take loan waivers “off the table”. This might not be implementable. Nevertheless, it is important to move towards a political consensus that prioritises other forms of alleviation of rural distress.