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

Abstract Case Intro 1 Excerpts

Excerpts

History of Loan Waiver in India

In India, the debt relief programs launched were largely in the form of farm loan waivers for poor farmers. The first case of a national debt relief program in India could be traced back to 1990. The then Finance Minister, Madhu Dandavate, announced an agricultural debt relief scheme to write off overdues or outstanding loans of farmers and artisans of up to Rs 10,000 as on October 02, 1989, by public sector banks and regional rural banks. The announcement of the scheme was made to fulfill a promise made by the National Front government headed by the Prime Minister V P Singh in its election manifesto. Though the scheme involved a fiscal cost of Rs.10,000 crore, the government believed that such a debt relief measure was a positive step that would contribute to better recoveries in the farm sector besides helping to identify wilful defaulters. Further, the government directed the banks to establish a system to maintain a proper credit history of borrowers covered under the scheme while promising to compensate them suitably for writing off the debt...

The Culture of Loan Waiver in Indian States

Many Indian states had launched debt relief and waiver programs at different times. Some of these schemes were for helping the poor farmers in difficult times while others had political motives. In 2014, the heads of the political parties Telugu Desam Party (TDP) and Telangana Rashtra Samithi (TRS) – Chandrababu Naidu (Naidu), and K Chandrashekar Rao (KCR) – in Andhra Pradesh and Telangana respectively, came to power and became the Chief Ministers of their respective states. The same year, Telangana became India’s 29th state after separating from Andhra Pradesh. Riding to power on the promise of a farm loan waiver, the Chief Ministers announced their schemes. On the one hand, KCR promised a loan waiver of not less than Rs 1 lakh to farmers in Telangana. On the other, Naidu announced a full waiver of loans given to farmers and women self-help groups (SHGs). However, later on, the full loan waiver announced was capped at Rs.1.5 lakh and Rs 1 lakh for farmers and women SHGs, respectively. For the Telangana government, the cost of the loan waivers was estimated at between Rs 17,000 crore and Rs 20,000 crore while for Andhra Pradesh, the figure was Rs 43,000 crore...

Tough Time for Indian Agriculture Sector

The reason for launching big loan waiver schemes was to help the farmers and the deteriorating agriculture sector in India. The Indian agriculture sector supported more than half of the country’s population but contributed to only 15% of its economic activity. Since 2000, the sector showed negligible development as there was little increase in the production of principal crops. (Refer to Exhibit II for Production of Principal Crops in India since 2001) One of the reasons for this sector facing a tough time was the global boom in food grain production which caused market prices to crash, affecting poor farming populations. However, in India, the major reason was the total dependence of the agriculture sector on the monsoons.....

Motivation Behind Loan Waiver Schemes

Given this background of the agriculture sector, farmers facing the burden of monsoon failures and droughts urged the state and central governments to help them out of cycle of indebtedness. As one farmer said, “Inputs costs are increasing every year, government gives us Urea at a cheap rate. Who will give us seeds, pesticides and other fertilizers? We are dependent on credit every season for purchase of seeds,” While another said, “I have got one and a half lakh rupees loan for irrigation development....

Implications

Though politicians and even many poor people favored the culture of farm loan waivers, economists and bankers believed that such initiatives could add to the states' and centre's fiscal burden besides affecting their finances over the medium to long term. They opined that the magic wand of a waiver was capable of bringing only temporary relief without offering the kind of long-term solutions needed to solve farmer woes....

Debt Relief Program in Other Countries

Unlike India, in other foreign countries, it was not farm loans that formed a major part of the consumer debt. For example, in the US, in 2015, student loans were the second-largest source of consumer debt. Given the fact that in the US, wages continued to stagnate and job opportunities remained scarce, the country made a provision for student loan forgiveness programs to lessen the debt load. (Refer to Box I for Details of US’ Student Loan Forgiveness Programs)....

Alternatives to Loan Waiver Schemes

The way the governments in India were offering loan waivers rang alarm bells in the country’s banking sector. If a loan waiver was the solution to the problems of the poor indebted farmers, there should not have been any farm distress after the 2008 debt relief program. However, the problems still persisted for the reason that their solution lay somewhere else and no government had tried to address the structural faults of the agriculture sector. Analysts were of the view that instead of providing monetary relief directly to the farmers, there were other alternatives to such a nationwide loan amnesty program through which the lives of poor farmers would remain unaffected in case of crop damage....

Road Ahead

Understanding the fact that loan waivers could not provide long-term solutions to farmers’ problems, the Karnataka budget started focusing on managing water. Though the state’s chief minister was pressured to waive crop loans, the state budget raised allocations to water resources to Rs 18,028 crore while continuing the interest-free, subsidized loans for farmers. Similarly, another state government, the Maharashtra government, allocated almost Rs 14,000 crore to the agriculture sector, mainly for irrigation. A small village – Hiware Bazare, situated in the rain shadow semi-arid region of Maharashtra adopted a community development program which included reforestation and integrated watershed development. Under this program, irrigation infrastructures were developed and water intensive crops like sugarcane, and banana were banned. As a result of these measures, Hiware Bazare became the village with the highest GDP in the country...

Exhibits

Exhibit I: Map of India Exhibit II: Production of Principal Crops (in Thousand Tonnes) Exhibit III: Land under Irrigation in India Exhibit IV(A): Deaths of Farmers/Cultivators in India from 2001 to 2015 Exhibit IV(B): Cause-wise Distribution of Farmers/Cultivators Suicides during 2015

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