Farm loan waiver and present issues of fiscal federalism


Present context: Raghuram Rajan’s comment on farm loan waivers.

Former Reserve Bank of India governor Raghuram Rajan has stressed on the need to do away with farm loan waivers citing “enormous” problems for state finances and investment. He also said that farm loan waiver should not form part of poll promises and he has written to Election Commission that such issues should be taken off the table.
  • loan waivers inhibit investment in the farm sector
  • It put pressure on the fiscal of states which undertake farm loan waiver.
  • It also vitiates the credit culture

Possible negative consequences of Loan waiver.

  • It covers only a tiny fraction of farmers. The loan waiver as a concept excludes most of the farm households in dire need of relief and includes some who do not deserve such relief on economic grounds.
  • It provides only a partial relief to the indebted farmers as about half of the institutional borrowing of a cultivator is for non-farm purposes.
  • In many cases, one household has multiple loans either from different sources or in the name of different family members, which entitles it to multiple loan waiving.
  • Loan waiving excludes agricultural labourers who are even weaker than cultivators in bearing the consequences of economic distress.
  • It severely erodes the credit culture, with dire long-run consequences to the banking business.
  • The scheme is prone to serious exclusion and inclusion errors, as evidenced by the Comptroller and Auditor General’s (CAG) findings in the Agricultural Debt Waiver and Debt Relief Scheme, 2008.
  • Schemes have serious implications for other developmental expenditure, having a much larger multiplier effect on the economy.
Location: Thiruvananthapuram, Kerala, India

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