Can Farm Loan Waiver Help Agricultural Sector?

Rajat K. Baisya

This year’s union budget is said to be good as there is something for everybody – young, old, women, invalid everybody included. Budget also has attempted to address all and particularly vulnerable sections of the society and many are saying that it is an election budget. Whatever it might be but no one criticized the budget being anti-growth. For industry, one can only expect that there will be additional money available to general consumers and women in particular because of lower taxation and relief and if the buying power is increased there will be growth triggered by increased consumerism. Otherwise there is nothing given to industry including processed food industry. The biggest thing that the budget has proposed is the loan waiver for small and marginal farmers. Will this help agricultural sector at all?. Can we examine some of the implications of this one time big waiver given to farmers? If agriculture benefits, the processed food industry has to also benefit from the rub off. But that is unlikely to happen.

As per current estimate the agricultural sector is projected to register a 2.6% growth in the year 2007-08 against the over all GDP growth of 8.7%. Government’s view is that this loan waiver is given in the context of sharp decline in the agricultural sector’s growth rate which can have impact on over all growth rate of our economy pegged at 9% in the 11th five year plan. It can be pointed out, however, that the objective of 11th plan is all inclusive and faster growth rate. The question is how the loan waiver is related to the growth performance of the agricultural sector. The contribution of service sector to our economy now is around 54 per cent and that of manufacturing sector is about 27 %. The agricultural sector contributes 19 per cent of our GDP. Both service sector as well as manufacturing sector is growing at a rate of about 10 percent whereas agricultural sector is growing at a low rate of 2.3 per cent. With about 60 per cent of our population dependent on agriculture as the principal source of livelihood, the falling contribution of agriculture to our GDP to well below 20 per cent will, in fact, fuel the urban-rural disparities and will stoke a lot of dissatisfaction among the rural populace.

The farming community is very unhappy with many government decisions like importing wheat at exorbitant price denying similar prices to domestic growers, offering lower minimum support price for paddy in comparison with wheat, increasing diesel prices and promoting special economic zones acquiring their lands at cheap rates etc. Under the circumstances any initiatives that helps farmers and boost agricultural production is welcome. The issue of this loan waiver is going to serve that purpose or not.

Most of the small and marginal farmers do not have the access to the institutional credits. The main reasons that are responsible for agricultural growth and indebtedness among farmers are: increasing cost of production and lack of adequate support, market prices that make it unremunerative, repeated crop failures, lack of adequate irrigation facilities as well as lack of adequate crop insurance, lack of institutional credit support and finally overexploitation of moneylenders. Alarmed by the spate of farmers committing suicide government had set up Radhakrishna committee to find out reasons for the farmers indebtedness. Among other things this committee had suggested setting up Rs 10,000 crores development fund for 100 identified distressed agricultural districts and also a one time measure of extending loan so that small and marginal farmers can settle the loan taken from the moneylenders. These are very useful suggestions and I don’t know why government has not taken any action in that regard.

The loan taken by small farmers from banks could have been rewritten and given options for longer term repayment. In any case small and marginal farmers would not have paid back the same and it would have been only remaining as entry in the book of accounts in banks as non performing assets (NPA). Readers will recollect that National Front Government headed by V.P. Singh implemented a similar debt relief scheme in 1990 and agricultural debts of small and marginal farmers to the extent of Rs 10,000 were waived. But it failed to lift the sagging morale of the farming community. In fact our government became bankrupt subsequently and in 1991 we followed the policy of liberalization. If it did not work well at that time why current government think that it will bring in the desired result in agricultural growth now when loan waiver is given in much larger scale. It should be pointed out here that these small and marginal farmers are also indebted to moneylenders which is a bigger concern for them. Waiver on institutional loan which in any case farmers would not have repaid cannot solve the problem of indebtedness of farmers. Bankers will be little relieved that their book will look cleaner. Their only worry would be from where this money will come to implement write off. But that was not the objective of the scheme. Besides, it is wrong to assume that all farmers cannot repay and therefore, giving blanket waiver also free them from this debt which will fuel financial indiscipline which in turn affect the future flow of credit to this sector. On the top of this one should not lose sight of the fact that any populist measure will always have a backlash.

Our finance minister has said that there is sound economic reason behind this big decision and this is not a populist stunt of the government eyeing next election to improve the electoral prospects of UPA government. But I am not able to see through the sound economic logic that govt. is talking about. In a larger sense this is again a some sort of subsidy which will not help in the agricultural growth. Neither it will help boosting the moral of our small and marginal farmers.

-- This article was first published in "Processed Food Industry" monthly magazine.

 

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