In the last three years, prices of various agricultural commodities have stood still or declined. Monsoon has also been poor. With these challenges, the run-up to the 2019 Lok Sabha election has been filled with talks of welfare measures for farmers like loan waivers, though the Congress did not promise it in its manifesto. 

The Congress had promised loan waivers for farmers in Chattisgarh, Madhya Pradesh and Rajasthan in its manifesto for the state assembly elections in December 2018. Each state has had a different experience implementing this promise.

The Congress experience 

In MP, only the loans due as of March 31, 2018 were initially waived when Congress assumed power in December 2018. This was not very helpful as farmers generally pay old loans and take new ones for the new cropping season.

Later, the ambit of waiver was expanded but farmers had issues registering for the waiver. Those farmers who got a waiver had mixed experience — some complained of getting a small waiver as against a larger loan amount. Others complained they got a loan waiver when they had taken no loan! Operational issues continue to haunt the MP loan waivers, which will resume once the Lok Sabha polls are over. 

In Chhatisgarh, of about 40 lakh farmers, only a few (nearly 8 lakh, say media reports) have got loan waiver, which average between Rs 30,000 and Rs 50,000 per farmer. Many tribal farmers have been left out. In Rajasthan, there have been fewer operational issues reported, but there has been a question mark on the quantum of waivers implemented as against the manifesto promise.

Also read: Digging into BJP, Congress manifestos: Who is ahead of whom

Why loan waivers can’t fix it

Irrespective of the state, farm loan waivers are tough to implement. It is difficult for the government to determine why a farmer took a particular loan and whether it was used only for agriculture. 

Many loans are given not by big national commercial banks, but by smaller regional rural banks, cooperative banks, or small credit societies. These smaller institutions are not always thorough with their recordkeeping. End-use identification is a process fraught with errors and prone to easy manipulation. Waivers also tend to benefit larger farmers, who get loans worth higher amounts sanctioned with greater ease.

When the loan waiver implementation becomes tough for a state government, banks suffer. They do not get their outstanding amounts back and hence stop further funding for farmers. 

Even with 100% correct implementation of loan waivers without any scam or irregularity, which is quite difficult to achieve, the average waiver ticket size tends to be in the range of Rs 30,000 to Rs, 50,000 covering about 50-60% farmers only. When Maharashtra tried to create an accurate waiver process, it ran into several legacy issues of misrepresentation, identity misstatement, and outright frauds in rural banks.

Loan waivers also lead to banks switching off the credit tap immediately, while the state governments may take months if not years to pay back the banks. Farmers stop paying as soon as an election promise is made. The absence of new loans then hits the farmers for the upcoming cropping season. Several farmers thus end up trading past distress with a future one. Due to this, the loss that farmer will suffer may be higher than the benefit he will get from loan waivers.

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Interest-free and hassle-free

The BJP roadmap on agriculture loans are more realistic and better for maintaining an agrarian credit culture. The BJP manifesto promise of up to Rs 1 lakh incremental new loan to farmers without interest is much better for farmers because this is additional money in hand in times when the farmer needs it the most. 

This will result in farmers being able to make upfront investments on a range of material needed for a very cropping season. Farmers who grow two crops a year can plan for both the seasons, using interest-free easy credit.

In the past, Madhya Pradesh has employed this idea to increase cash flow in the farm sector and in the rural economy in general. Interest free loans, a program pioneered by the ex-chief minister Shivraj Singh Chouhan, have contributed in a big way in MP becoming a big agricultural producer, especially a leading state in wheat production. 

This promise also helps bank deploy their deposits. With the bank credit growth being muted over the last few years, this provides banks an avenue to enroll potential new customers, with a very low cost of acquisition. This incremental Rs 1 lakh loan will be in addition to the Rs 6,000/year promised by the BJP as samman nidhi under the PM-KISAN Yojana, declared in the 2019-20 budget but implemented already in February 2019.

No burden for the banks

India's current farm loan outstanding is Rs. 12.5 lakh crore. This is approximately 15% of the total banking credit. Assuming credit growth of 12-14%, additional agricultural credit of Rs 10 lakh crores is possible in next 5 years. Of this, Rs 5 lakh crore credit to 6-7 crore farmers, (assuming some may borrow less than Rs 1 lakh) is possible to be disbursed through the interest-free loans proposed in the BJP manifesto. For Rs 5 lakh crore worth of loan disbursement, the government may have to bear an interest cost of Rs 40,000 to Rs 50,000 crore. This should be about 0.1% of the GDP in 2024, not an alarmingly high figure.

There will be a collateral benefit of such a program. The organized banking sector will make headway in the rural areas. Some government owned banks may even be able to expand their retail business, enrolling new customers and cross-selling them other banking products. With the successful example of Madhya Pradesh, interest free farm loans look like a good idea functionally as well as fiscally to help stabilize the agrarian economy. These may also become the template over time replacing periodic farm loan waivers.

The interest free agriculture loans may be the right short-term measure to address the immediate agrarian issues

Also read: 10 most important takeaways from the BJP manifesto