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Farm Loan Waivers: Is There No End To This Political Gimmick?

    Mr. C.S. Sudheer | Wednesday, April 19,2017, 05:15 PM
 

 

Politics and Farm Loan Waivers. Two sides of the same coin. Just take a look at some of the farm loan waivers and their power to win elections.Take the farm loan waiver of INR 60,000 Crores, announced by the then UPA Government in the Union Budget 2008-2009. The UPA won the general elections 2009 with a whopping majority, riding on the back of this farm loan waiver and  Mahatma Gandhi National Rural Employment Guarantee Scheme, surprising even itself.

Then the UP elections....The BJP came to power in the recently conducted Uttar Pradesh elections, with a solid majority. Its poll manifesto.... waive off crop loans of all  small and marginal farmers. The BJP Government in UP has lived up to this promise. The UP Government announced an INR 30,729 Crore Scheme, to waive crop loans up to INR 1 Lakhs, helping small and marginal farmers in the State.

Now, farmers in Tamil Nadu and Maharashtra are demanding that their respective Government's waive off  farm loans. Soon, farmers in Haryana, Madhya Pradesh and Rajasthan will demand  waiver of farm loans. Karnataka is facing its worst drought in 40 years. With elections coming up in Karnataka in a year, a severely drought affected State, will politicians resort to farm loan waiver tactics? Where will the money to waive off farm loans come from? So many questions....just no answers.

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Politicians want votes. Farmers want farm loan waivers

 

It's raining and the farmer jumps with joy. Yes, The farmer in India depends on the monsoons to cultivate his crops. God forbid, if the monsoons fail and there is a drought.....So why do farmers avail farm loans? Farm loans may be crop loans or loans availed by farmers to buy equipment. Now, all the farmer needs is a good monsoon.

If the monsoons are good, farmers get a bumper crop. But if the monsoons fail...The famer cannot repay his farm loan. He looks to his friend in need, The Politician, to help him out of this mess.

The motto of politicians is " Get Votes, Win Elections." Farmers are a very large vote bank, which no politician can dare ignore. All a politician has to do is promise farm loan waivers and tap votes.

 

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Why Farm Loan Waivers Are A Very Bad Idea?

 

1. Farm loan waivers encourage farmers to default on loans

 

The RBI Governor Urjit Patel and State Bank of India Chairman, Arundhati Bhattacharya, believe farm loan waivers are a very bad idea. Why is this so?Farm loan waivers encourage farmers to default on farm loans. The farmer becomes a willful defaulter and simply waits for the farm loan waiver. Why will he repay the farm loan when he knows that the Government will waive it off? Farm loan waivers punish the farmer who has been regularly repaying his farm loan, despite hardships. Doesn't he suffer a loss if he has been repaying the farm loan, before the announcement of the farm loan waiver scheme? Many farmers will not bother repaying farm loans, even if they can afford to make the repayments.

Think about it. Where does the money for the loan waiver come from? It comes from your tax money. Farmers default on loans and politicians get votes. With more and more politicians promising farm loan waivers, the honest tax payer has to bear the cost of the farm loan waivers.

 

2. Banks simply hate farm loan waivers

 

Yes, Governments waive off farm loans, but who foots the bill? State Government's finance farm loan waivers by issuing farmers relief bonds. Take the case of the UP Government. It has decided to issue Kisan Rahat Bonds to raise money for the farm loan waiver. These bonds are guaranteed by the State Government.

Banks would be forced to subscribe to these bonds. Interest is paid to the banks, but banks would prefer that the Government  pay the whole amount in cash immediately.

Farm loan waivers encourage borrowers to default on farm loans. Now banks are worried, farmers might next default on tractor loans.

 

The Maharashtra Government has an alternative to farm loan waivers

 

The UP Government has waived off farm loans. While other States are looking to follow this approach, the Maharashtra Government sees things differently. The Maharashtra Government would give grants or subsidies to farmers for laying a network of pipelines for drip irrigation. There would be subsidies for seeds and fertilizers. With these measures, farmers would have very low input costs. Drip irrigation could reduce farmers dependence on the monsoons, eliminating the need for farm loan waivers in the future.

This move could encourage farmers to stand on their own feet. There are also discussions to give farmers a guaranteed price for the farm produce. What use are farm loan waivers if farmers just default on farm loans and wait for the next loan waiver?

Farmers have long been a victim of the APMC Act. This system forces farmers to sell their produce to middlemen at low prices. A farmer cannot sell his produce to a supermarket, even if he wants to. This rule was made to protect farmers from evil corporates, but finds no relevance, today.  The Prime Minister has launched e-NAM an online portal, where farmers can trade their produce and be free from the clutches of middlemen. With this online portal, a farmer can decide where to sell, when to sell and at what price to sell his produce. The farmers produce is sold, even before he loads it on his cart. Be Wise, Get Rich.

Mr. C.S. Sudheer

Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.

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