India's Loan Waiver Culture: Is it Bad Economics?

Case Code: ECON064
Case Length: 16 Pages
Period: -
Pub Date: 2017
Teaching Note: Available

Price: Rs.500
Organization : -
Industry : -
Countries : India
Themes: Farm Loan Waiver, Debt Relief,Indian Economy, RBI

"Higher capital investments in agriculture adequately backed by water and power supplies over a longer period will bring greater economic stability to small and marginal farmers. Any crop loan waiver is not a lasting solution. It helps farmers get rid of debt but doesn’t increase his repaying capacity when he goes for his next crop loan. Instead of a one-time crop loan waiver, which will certainly give us political mileage, our policies are to free farmers from the vicious cycle of debt."

– Devendra Fadnavis, Maharashtra Chief Minister, 2017.

"Waivers undermine an honest credit culture... It leads to crowding-out of private borrowers as high government borrowing tend to (impose) an increasing cost of borrowing for others. I think we need to create a consensus such that loan waiver promises, otherwise sub-sovereign fiscal challenges in this context could eventually affect national balance sheet."

– Urjit Patel, Governor, Reserve Bank of India, 2017.

Introduction

On June 01, 2017, farmers in two of India’s largest states – Madhya Pradesh (MP) and Maharashtra – (Refer to Exhibit I for Map Of India) began protests over a wide range of issues concerning their livelihood. Both these states were ruled by the Bharatiya Janata Party (BJP), considered to be a pro-farmer party. Among other things, the farmers in MP were demanding a minimum support price (MSP) for their farm produce. The agitated farmers dumped produce and milk on the streets and blocked highways, leading to a shutdown of wholesale markets. As a result, vegetable prices shot up. The protests turned violent when six farmers were killed by the state police in MP and, subsequently, curfew was imposed in some cities. The protest crippled both the states. This protest was believed to be inspired by a bold step taken by the Uttar Pradesh (UP) Chief Minister in April 2017 to waive farm loans for farmers in the state. Therefore, farmers in Maharashtra and Madhya Pradesh also raised similar demands.

On June 11, 2017, amid protests, the Maharashtra government announced a complete loan waiver of Rs 30,000 crore to small and marginal farmers 8 who had repaid their loans regularly in the past.

The root causes of the agitation in the two states were successive droughts, unusual bumper crops, a cash crunch, and the wholesale price crash which had hit the farmers hard. Analysts believed that though a total loan waiver was neither possible nor good for the economy, the Indian government and the state governments should address farmers’ problems and be firm on the MSP. The UP loan waiver scheme was not the first time a state government had resorted to such a step for solving farmers' problems; there had been many cases in the past as well of some states and the Indian government going in for such short-term solutions. However, economists, bankers, and analysts were critical of debt relief and debt waiver schemes. Such schemes, according to them, undermined an honest credit culture and posed fiscal challenges for the state and central governments. There were concerns that debt relief schemes were politically motivated policies, floated more to lure voters than as a solution to farmers’ problems. Though the Indian central government took several initiatives to tackle the causes of the weakening agriculture sector in the country, a lot remained to be done.

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