Bailouts Fail to Rescue India Farmers Trapped in Debt Spiral

  • States demanding countrywide agriculture loan waiver program
  • Farm loan waivers win votes but increase rural economic stress

An election promise to farmers in the politically sensitive state of Uttar Pradesh is coming back to haunt Prime Minister Narendra Modi, as other states demand the federal government offer an agriculture bailout package across the country.

During the hard-fought election campaign, Modi pledged that if his party was voted to power in Uttar Pradesh, it would write off loans of farmers. Earlier this month, the Bharatiya Janata Party formed government after securing a significant majority in the state.

Kumarpal Singh

Photographer: Bibhudatta Pradhan/Bloomberg

In Bajherakhurd village in Uttar Pradesh, Kumarpal Singh is eagerly awaiting the announcement that will result in part of his current 640,000 rupees loan ($9,772) being waived. He received a bailout of 10,000 rupees in 1990.

“It will give me some relief from the loan burden -- otherwise I will sell part of my land,” said Singh, 67, describing how it is tough for him to pay off the loan due to crop damage and poor prices for his rice and wheat. “We farmers are in a dying state.”

Singh paid a 10 percent cut to a middleman to facilitate the crop loan, which attracts an annual interest rate of 7 percent. Even though the loan agreement says he has to spend the money for agriculture purposes, he spent most of the money on his daughter’s marriage. With his farm income reduced, he is now in a debt trap.

Controversial Tool

The farm loan waiver is one of India’s most popular, often-used political tools. In 2009, it helped to return to power Manmohan Singh’s Congress-led government, which offered borrowers a bailout program in which 37 million farmers benefited from waivers of 522 billion rupees. In 1990, the government of Prime Minister V. P. Singh also offered an agricultural debt relief program of up to 10,000 rupees for each borrower. In Andhra Pradesh and Telangana, two separate regional parties came to power in 2014 on the promise of a loan waiver.

But the figures don’t add up. Farm waivers increase the budget deficits of federal and state governments and escalate inflation. When he was Reserve Bank of India governor in 2014, Raghuram Rajan said such programs ultimately constrained credit flow to farmers. The waivers also disrupt credit discipline among borrowers, Arundhati Bhattacharya, chief of State Bank of India, said this month.

“It’s an atonement at one end of the failure of the past policies, and an appeasement on the other,” said Ashok Gulati, a professor with the Indian Council for Research on International Economic Relations, in New Delhi, arguing loan waivers are not a solution to farmers’ distress.

India’s agriculture sector needs significant reforms, including land leasing, streamlining the incentive structure to promote private sector investment as well as policy changes for essential commodities and markets, he said. “You need to have political will to carry out this agenda,” said Gulati.

Needy Farmers Neglected

While high levels of household debts have been recognized as a significant cause of farmers’ distress, the use of unconditional debt relief to improve living conditions, crop productivity and to reduce suicides is controversial. About 52 percent of India’s 90 million agricultural households are indebted. According to the latest government data, 43.8 percent of the 18 million farm households in Uttar Pradesh had outstanding loans in the agricultural year that ended June 2013, with an average loan of about 27,300 rupees.

The debt relief program also fails to provide assistance to landless farm workers who don’t have access to bank loans and some small farmers that depend on money lenders.

The chief auditor in its 2013 report on the 2008 loan waiver program found cases in which deserving small farmers were left out while ineligible farmers were favored. The write off also took its toll on banks as the non-performing assets of commercial banks rose three-fold in nominal terms in the four years to March 2013, according to a 2015 report from ICRIER.

Agriculture scientist M.S. Swaminathan said loan waivers should be used only when farmers have no other way of getting credit for their next crop.

“Farm debt waiver is not a permanent solution to farmers’ problems,” said Swaminathan, the architect of India’s green revolution in the 1960s. “When farmers find it difficult to get credit following the failure of the previous crop, the debt waiver will be useful to get them launched in agriculture again.”

Targeted Assistance

Not all farmers are keen for a debt bailout. Mahendra Swarup Tyagi, 75, wonders how a one-time loan waiver will end his misery, as he is forced to sell his potatoes at just four rupees a kilogram, less than it costs him to grow his crop.

Mahendra Swarup Tyagi

Photographer: Bibhudatta Pradhan/Bloomberg

“We want the right price for our produce,” said Tyagi, who has a loan of 150,000 rupees. “If the government wants to help farmers, it should give us more assistance on electricity, diesel, fertilizer and seed.”

Outstanding countrywide agricultural loans as of Sept. 30 were at 12.6 trillion rupees, as farmers struggle with a decrease in land holdings, deteriorating soil quality, high input costs and low prices for their produce.

“Farmers are virtually on their death bed, so some booster dose will be helpful, but I don’t know for how long the farmers will be kept alive,” said P. Chengal Reddy, chief adviser to the Consortium of Indian Farmers Association, arguing the need for a loan waiver. “If BJP wants to retain power the first thing they have to do is to appease the farmers. Pleasing farmers through a loan waiver is a very big political advantage.”

In Uttar Pradesh, the government will lose 274 billion rupees or 8 percent of its total revenue when the loan waiver is implemented for small and marginal farmers, according to a March 20 State Bank of India research paper, which notes the total outstanding credit for the state’s agricultural sector is around 862 billion rupees. “This will definitely cause some amount of stress for the state’s fiscal arithmetic in the coming year,” it said.

Several states had requested farm loan waivers, Finance Minister Arun Jaitley told parliament last week, adding the federal government won’t adopt a selective approach to any particular state bearing the debt burden. The chief ministers of Punjab and Maharashtra have issued a public plea for farm loan waivers for their states, however the government has not indicated whether it will consider a nationwide waiver program.

A farmer from Tamil Nadu wears a necklace made from human skulls during a protest in New Delhi on March 24.

Photographer: Prashanth Vishwanathan/Bloomberg

At Delhi’s Jantar Mantar, an 18th-century observatory and traditional rallying point, more than 30 farmers from southern state of Tamil Nadu staged a protest last week holding the skulls of farmers who had committed suicides in their region. They were demanding farm loan waivers, saying they are not in a situation to repay their debts because of severe droughts.

“We’ve come all the way from Tamil Nadu to protest against this government’s indifferent attitude towards farmers,” said A. John Mekioraj, 51, farmer from Nagar village in Tiruchirappalli. “The bank tells me they will auction my property -- I want justice from the government.”

— With assistance by Archana Chaudhary

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