Give farmers better prices, not blanket loan waivers

Such schemes have huge fiscal costs and weaken credit discipline

The seeds of loan waiver sown by Prime Minister Narendra Modi, in the form of a promise made during the UP assembly elections, have now turned into a full-grown tree spreading its roots across states. What began with the UP government’s announcement in April, followed by Maharashtra, yet another BJP-ruled state, has now been emulated by Punjab and Karnataka where the Congress is in power. It’s true that the farming community has gone through a harrowing time, whether due to adverse weather events in 2014-15 and 201516 or the more recent price crash across agri-commodities following demonetisation. If at all there is anybody deserving of special support today, it is certainly farmers. But are loan waivers the right way to go about that? To the extent that they impose fiscal costs, these schemes also entail diversion of public resources that could have gone to build rural roads, hospitals, schools and irrigation works. Empirical evidence also suggests that weakened credit discipline from repeated waivers creates disincentives for further lending by banks.

A loan write-off would be worth it if it specifically targets farmers who have fallen out of the institutional credit system. These farmers, and also those who have always been dependent on borrowing from local moneylenders and traders, have every right to be able to access formal finance that makes them more productive. But farmers would be better helped if they are allowed to realise remunerative prices for their produce.