Looking Beyond Farm Loan Waivers: Emerging Perspectives – Part 1

The announcement of loan waivers for farmers has been cited as one of the key factors for a leading national party’s return to power in three Hindi heartland states of Madhya Pradesh, Chhattisgarh and Rajasthan. As we write this, diverse views from numerous experts on the efficacy of farm loan waivers are already in the air.

Below are some of the key common views:

1. Farm loan waivers for all the farmers in the country: If the country can waive off loans of Industrialists and Corporates, why not waive off farmers’ loans?

2. Since it’s the political parties that promise loan waivers, and not the taxpayers, why shouldn’t it be the political parties that fund the loan amount from their party funds instead of the national exchequer bearing the burden?   

3. This is not a solution as it does not encourage fiscal discipline as seen with Interest Subvention Schemes where farmers were given either interest-free loans or loans at interest rates significantly lower than the market rates.

4. Loan waiver is not a solution as it leaves out cultivators and does not benefit a majority of the farmers who have not taken any loans. 

5. While banks do not lose out in the situation of a loan waiver as the Government reimburses them, loan waivers harm the country as they encourage a “not paying back the loan” culture that leads to banks shying away from fresh agri loans.

Add to it the recent farmers’ rallies in Maharashtra and Delhi highlighting “farm distress” and seeking sustainable solutions for the same. In these rallies, “waiver of farm loans” emerged as one of the most vociferous demands and the Government agreed to most demands, including a waiver on farm loans taken before June 2017.

Farm loan waivers are not a panacea but seem to be the critical difference between winning and losing a seat. Here’s a moot point: why do farmers who have not taken any loan / paid back their loan on time and taxpayers who do not support such moves not vote against political parties who demand farm loan waivers? If done, this could be a big game changer for the upcoming 2019 polls.

Having stated the current perspectives, let us dive deeper into the malady of farm distress to come up with a different perspective:

Linking Commodity Spot Markets with credit linkages could be a powerful solution to help Smallholder Farmers (SHFs) – in both short-term and long-term so that both the markets complement each other. At one end, we have Priority Sector lending targets that remain unmet by most banks leading to a lack of short-term post-harvest credit for SHFs. The lack of formal short-term credit to SHFs has led to a sprawling informal credit sector and the advent of more expensive Non-banking Financial Companies (NBFCs) into the agri-finance space. This leads to a further shrinkage of formal credit to Spot Markets that are linked to agricultural commodities.

If we take out consumption credit from the equation, then ‘Credit’ and ‘Markets’ need to be looked together cohesively and not in isolation of each other. On the policy front, there is a lack of convergence on agri-credit and agri-market initiatives. Standalone policy measures to relieve “farmer distress” is not likely to work in the future as it has not worked in the past either. Farm loans, being part of using credit as a tool to enable better living standards may deliver better results if linked with markets.

Financial Stock Exchanges are a good example where ‘Credit’ and ‘Markets’ are interlinked and the complementary link (through a regulatory mechanism) works well for Corporate Markets. But this is not the case with Commodity Exchanges and Commodity Spot Markets. While Corporates can raise loans through bonds and debts, Spot Markets are supported by the Government. However, Commodity Markets other than Bullion and Crude Oil (these are industrial commodities) do not have well-developed commodity credit linkages.

It is possible that the right policy instruments on linking ‘Markets’ with ‘Credit’ would not only help reduce farm distress (owing to credit) but also help SHFs get better prices for their produce in agricultural Spot Markets.

We would be happy to seek your views on this new perspective i.e. linking Commodity Spot Markets with short-term credit linkage initiatives to enhance famers’ bargaining power leading to a better realization for their agriculture produce.