CPRG India > Publications Articles  > Waiving of Farm Loan Is Detrimental for The Country

Waiving of Farm Loan Is Detrimental for The Country

The stratagem of waiving off loan has become a vogue in recent times and has become a mitigating factor to silence the uprising of farmers against the government. A loan waiving is a process in which amnesty is offered to a particular class or category of borrowers as a matter of policy by the state or central government. Any laymen would applaud the government for taking farmers away from the impoverished situation but ultimately it falls back on the economy and the subsequent pitfalls that waiving off loans becomes a monster in guise. It is becoming an unavoidable skirmish that the opposition is using to gain popularity among the innocent masses.

The recent waiving off loan by the Congress in the state of Madhya Pradesh is one such epitome. Since the inception, Congress has thrived itself on the appeasement policy. It has been the routine of the party to take up the populist measure which can help it to form the government. It tries to resolve the problems temporarily but in the long run, it is the public policies which get damaged by these populist measures by the political parties. There are several cons of introducing waiving of farm loan in our country.

First, the fiscal strain of farm loan waivers on the States is worrisome. While loan waiver frees the borrower completely from liability to pay and becomes a direct burden on State finances. The governments in the latter part of their reign are forced to reduce the amount of grant in the public policies. This, in turn, has wide repercussions and will curtail the allowances for education, health care, infrastructure, etc.

Secondly, in the short run, it will lead to inflation of prices of commodities in the market. The way to control forms a quintessence of any economy and if the government because of external factors is forced to increase the price then it will have a direct impact on the economy. Thirdly, the waiving off loan creates a moral hazard in the country. The farmers will turn into deliberate defaulters in the hope that their loans will be waived sooner or later. This leads to a vicious cycle of pre/post-poll expectation among farmers, which will end up making the formal system wary of extending credit.

Fourthly, it is going to impact the banking sector and the farmers in the long run as Banks will become paranoid about extending the loan for agricultural purpose. After the announcement of the waiver scheme, banks will no longer receive any interest on the loan they credited to farmers. The government takes time to deposit the waiver amount and thus it will deprive them of interest and the principal amount, for a however short period of time. This will discourage banks to provide loans to agriculture. Thus, farm loan waivers can discourage subsequent lending by banks in districts with greater exposure to the debt waiver, harming farmers over the long run.

Fifthly, the impact on state finances could have been justified had the waivers provided meaningful relief to India’s distressed rural economy. Sadly, this is unlikely to happen in the Indian agrarian set up as the poorest farmers in India typically rely on non-institutional sources of credit such as local moneylenders etc. Ergo, the waiving off the loan will not penetrate to the needy farmers in the state.

Alternatively, the government can resort to several measures which will de-stress farmers without hurting the economy of the country. The better irrigation facility, better training of farmers can make more impact on the condition of the farmers. but sadly, these measures can not give votes to political parties thats why they hesitate to discuss these measures. In begining of this term, NDA has tried to follow this path but political loss have brought back them on same popular path.


Sumit Kumar Gupta

NUJS, Kolkata