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Moving away from loan waivers to sustainable policy making

Unupom Kausik

Amidst forecasts of a normal monsoon, the rains this season turned out to be highly unevenly distributed and its consequences will be borne by the farmers through the season. While the floods in western and eastern India washed away the early sowings and incited pest attacks, the continued shortfall of showers in south has resulted in its own set of woes. For a country facing weather vagaries of this magnitude, one off compensation scheme like loan waivers is a highly unsustainable solution to farmer distress and detrimental to the economy's resources. The mid-year economic survey recently released, warned against farm loan waivers stating that if all states start offering them, the total burden could swell to Rs 2.7 lakh crore.

Rising incidence of loan waivers has made it difficult to disagree with the fact that agricultural credit is being used as more of a political instrument rather than developmental. Before more states follow, the league of Maharashtra, Uttar Pradesh Tamil Nadu and Punjab, it is critical for the governments to understand that writing off farm loans would worsen the credit indiscipline amongst farmers while draining the state finances. Apart from breeding the much talked about problem of moral hazard amongst farmers, the loan waivers impact the lending patterns of the banks as they become selective in their credit extension. Banks in past have shown tendency to downsize credit operations in districts with frequent loan waivers. All such waivers, be it in 1990, 2008 or possibly 2017 too, were followed by farming community suffering credit crunch because of banks' apprehensions of loan recovery in next season. This in turn has an adverse impact on the agricultural activities of that region and gives way to informal lending at usurious rates. As Urjit Patel stated, loan waivers lead to crowding-out of private borrowers as high government borrowing tend to impose an increasing cost of borrowing for others. RBI meanwhile rang a warning bell on large farm waivers causing inflationary spill overs. Additionally, indebtedness is widely a problem more of small and marginal farmers. However, the waivers often fail to make a distinction between those who need it and those who do not, and this inflates their burden as well as the fiscal deficit of the states.

What then can be viable solutions for alleviating farmer distress?

A meticulous approach focused on agricultural risk mitigation, augmenting net farm incomes and improving productivity will be far superior to the short term ad hoc compensations.

Risk mitigation can be achieved through well-designed, farmer friendly weather based crop insurance schemes. Weather based insurances will be more cost effective than doling out pay offs after a bad monsoon. The current insurance scheme, Pradhan Mantri Fasal Bima Yojana, needs to be made more comprehensive and efficient in its coverage of the weather element to shield the farmers from weather risks.

Ensuring fair remuneration to farmers for their produce is a key to improving their incomes. Price stabilisation and marketing support from the government is a necessity. An important component of a market driven and sustainable system, that does not put an onerous burden on the exchequer, will be to allow a larger role for the private sector. Through a well-designed incentives and duties framework, private entities can engage in procurement from farmers under a set of conditions to stabilise prices and prevent them from tumbling below the MSP levels. Greater focus on increasing India's agriculture exports will also help boost farmer incomes. In addition to this, the governments need to look beyond the agricultural incomes of the small farmers. China has increased its rural income through a lot of non-farm subsidiary associated activities besides agriculture income. India can take a cue from this example and help facilitate farmers' access to allied sources of income. This can go a long way in securing a part of their income from agriculture risks and reducing the loan default rates.

Crop productivity in India has not kept pace with innovative technologies adopted across the world. There is a need to educate the farmers, improve their access to quality farm inputs and raise productivity through biotechnology and genetic-engineering approaches to ensure more production and profitability in the farm sector.

Further, steps towards providing education facilities and health, and uplifting the overall socio-economic status of small and marginal farmers will help them service their loans better.

Thus, a shift in approach of state governments from ad hoc pay outs to sustainable and sound policies for stabilising farm income and managing agriculture risks in long term is the need of the hour. This will be in line with the government's aim to double the farmers' income in coming years, help in better utilisation of state finances, and at the same time reinforce an honest credit culture in the long run.

Disclaimer: The opinion expressed in this article is the personal opinion of the author. The views and opinions expressed in this article do not reflect the views and opinions of the NIAM Alumni Association (NAA). This article is a guest column and NAA does not assume any liability or responsibility for the same.

By Unupom Kausik| NOV. 1, 2017 |

Mr.Unupom Kausik

Mr.Unupom Kausik is the Deputy CEO of National Collateral Management Services Ltd. He brings in a wealth of experience for having worked in commodities domain for almost 15 years out of his overall experience of 25 years. His skill sets comprise of commodity trading, risk management, logistics & supply chain management, organisation and business development etc. He is an Electrical Engineer with Post Graduation in Rural Development from Institute Of Rural Management, Anand (Gujarat) and has a Fellowship in International Cotton Trade.