Rural Distress, Farmer Suicides, Drought Measures

[op-ed snap] Loan waiver is not the solution

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Mains Paper 3: Agriculture | Issues related to direct & indirect farm subsidies & minimum support prices

From UPSC perspective, the following things are important:

Prelims level: Regional Rural Banks, NABARD, Kisan Credit Card scheme, Interest Subvention Scheme, Pradhan Mantri Jan-Dhan Yojana, International Food Policy Research Institute, Committee on Doubling of Farmers’ Income

Mains level: Disadvantages of Farm loan waivers and alternative measures


Increase in institutional credit to farmers

  1. Since Independence, one of the primary objectives of India’s agricultural policy has been to improve farmers’ access to institutional credit and reduce their dependence on informal credit
  2. As informal sources of credit are mostly usurious, the government has improved the flow of adequate credit through the nationalization of commercial banks, and the establishment of Regional Rural Banks and the National Bank for Agriculture and Rural Development
  3. It has also launched various farm credit programmes over the years such as the Kisan Credit Card scheme in 1998, the Agricultural Debt Waiver and Debt Relief Scheme in 2008, the Interest Subvention Scheme in 2010-11, and the Pradhan Mantri Jan-Dhan Yojana in 2014
  4. The result is that the share of institutional credit to agricultural gross domestic product has increased from 10% in 1999-2000 to nearly 41% in 2015-16

Farm waiver scheme may slow down this pace

  1. While the flow of institutional farm credit has gone up, the rolling out of the farm waiver scheme in recent months may slow down its pace and pose a challenge to increasing agricultural growth
  2. The Uttar Pradesh government has promised a ₹0.36 lakh crore loan waiver covering 87 lakh farmers, whereas the Maharashtra government has announced it’s writing off ₹0.34 lakh crore covering more than 89 lakh farmers
  3. The demand for a loan waiver is escalating in Punjab, Karnataka, and other States
  4. This clamor is only poised to increase as the 2019 general election comes closer

International studies on farm loans and waivers

  1. At the global level, studies indicate that access to formal credit contributes to an increase in agricultural productivity and household income
  2. Such links have not been well documented in India, where emotional perceptions dominate the political decision quite often
  3. A recent study by the International Food Policy Research Institute reveals that at the national level, 48% of agricultural households do not avail a loan from any source
  4. Among the borrowing households, 36% take credit from informal sources, especially from moneylenders who charge exorbitant rates of interest in the 25%-70% range per annum

Advantages of formal credit

  1. The study using the 2012-13 National Sample Survey-Situation Assessment Survey (schedule 33) finds that compared to non-institutional borrowers, institutional borrowers earn a much higher return from farming (17%)
  2. The net return from farming of formal borrowers is estimated at ₹43,740/ha, which is significantly greater than that of informal sector borrowers at ₹33,734/ha
  3. Access to institutional credit is associated with higher per capita monthly consumption expenditures
  4. Access to formal institutional credit also tends to enhance farmers’ risk-bearing ability and may induce them to take up risky ventures and investments that could yield higher incomes

Need for formal credit

  1. A negative relationship between the size of farm and per capita consumption expenditure (a proxy for income) further underscores the importance of formal credit in assisting marginal and poor farm households in reducing poverty
  2. Statistics show that nearly 82% of all indebted farm households (384 lakh) possess less than two hectares of land compared to other landholders numbering 84 lakh households
  3. Those residing in the less developed States are more vulnerable and hence remain debt-ridden

Intended beneficiaries remain excluded from farm loan waivers

  1. Problem: A major proportion of farmers remain outside the ambit of a policy of a subsidized rate of interest, and, for that matter, of loan waiver schemes announced by respective State governments
  2. This sop provides relief to the relatively better off and lesser-in-number medium and large farmers without having much impact on their income and consumption
  3. Solution: This anomaly can be rectified only if the credit market is expanded to include agricultural laborers, marginal and small landholders
  4. It is, therefore, important to revisit the credit policy with a focus on the outreach of banks and financial inclusion

What more needs to be done?

  1. The government along with the farmers’ lobby should desist from clamoring for loan waivers as it provides instant temporary relief from debt but largely fails to contribute to farmers’ welfare in the long run
  2. This is because farmers’ loan requirement is for non-agricultural purposes as well, and often goes up at the time of calamity when the state offers minimal help
  3. If governments are seriously willing to compensate farmers, they must direct sincere efforts to protect them from incessant natural disasters and price volatility through crop insurance and better marketing systems
  4. It should be understood that writing off loans would not only put pressure on already constrained fiscal resources but also bring in the challenge of identifying eligible beneficiaries and distributing the amount

Report of the Committee on Doubling of Farmers’ Income

  1. The report of the Committee on Doubling of Farmers’ Income, Ministry of Agriculture and Farmers Welfare, has suggested accelerating investments in agriculture research and technology, irrigation and rural energy, with a concerted focus in the less developed eastern and rain-fed States for faster increase in crop productivity and rural poverty reduction
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