Yogi Adityanath’s decision to waive off farm loans in Uttar Pradesh soon after his election is influencing farmers in other states to demand the same. With the ongoing agitations in Maharashtra and Madhya Pradesh, farmers in other states are likely to follow suit.
Waiving of farm loans impacts various stakeholders such as farmers, state government, banks, and consumers.
Problem with Loan Waiver
While the farmers who have not serviced their loans, can expect immediate benefits, those who have done so would curse themselves. This is significant moral hazard which will alter farmer behaviour.
Henceforth, farmers would not service their loans or return the principal, expecting the state to bail them out.
On the other hand, lenders will be reluctant to extend credit to farmers in future, making credit more inaccesible to the agrarian sector.
Credit is critical for farming operations and higher yields. Without credit, farmers’ yields will go down. Their short term gain involves long term pain.
Long Term Pain
Such a loan waiver might get farmers’ votes if the decision is announced shortly before the elections. However, UP has done it just after the election. Whether the farmers will remember it till the next election or not is hard to predict. Thus the political gains, if any, are difficult to assess.
Also, the state would have to compensate the lender banks for the loans waived. If the state has fully borrowed the money up to the limit on borrowing stipulated by the Reserve Bank of India (RBI), and does not have the fiscal space to borrow, it will have to cut some expenditures, which are most likely to be developmental or welfare expenditure.
If it has fiscal space to borrow more, or if the central government or the RBI permits it to borrow more, the state need not cut down other expenditures, but it will raise fiscal deficit of the country.
This, in turn, can cause inflation and prompt the RBI to raise interest rate, reducing investment and economic growth.
It will result in higher inflation and lower growth. This will hurt the poor with many of them being landless labourers.
Stress on Banks
If the state government compensates the banks fully and in time, they will be happy as the high cost of collecting the money from farmers and the uncertainty of getting the money back would be eliminated. Their potential non-performing assets (NPAs) will become performing assets. However, the state might delay paying the banks, increasing pressure on our already stressed public sector banks.
States Shouldn’t Take a Cue from UP
The people who do not own any land will suffer the most from higher inflation due to increased fiscal deficit. Also, future reduction in agricultural output as farmers are denied credit will lead to higher food prices, which will hurt the poor most.
To summarise waiving farm loans for all farmers is a bad idea. If distressed farmers had to be given help it should have been done through measures that do not create moral hazards and jeopardise the credit system. One hopes that other state do not follow UP’s example.
(The writer is Former Member, Planning Commission and Chairman, Integrated Research and Action for Development (IRADe). This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)