A waiver of this scale could pay for the 2017 rural roads budget 16 times over or pay for 443,000 warehouses or increase India's irrigation potential by 55% more than the achievements of the last 60 years.
While such waivers could provide succour for 32.8 million indebted farmers, an IndiaSpend analysis of the impact of previous farm-loan waivers indicates such bailouts are band-aids of uncertain efficacy and do not address a deeper malaise gripping India's agrarian economy.
The waivers were primarily meant to discourage suicides by farmers, apparently caused by widespread indebtedness. However, our analysis shows this had little or no impact on suicide rates, probably because 32.5% on average, or 79.38 million, small and marginal farmers across India (with farm holdings of less than 1 to 2 hectares in size) rely on informal sources of credit.
For example, Maharashtra's Rs 30,000 crore farm-loan waiver for small and marginal farmers will raise the state's fiscal deficit to 2.71%, which is three-fourths (1.18 percentage points) higher than the budgeted deficit of 1.53% of the gross state domestic product (GSDP) for the current financial year, according to this 2017 report by ratings agency India Ratings and Research (Ind-Ra). Uttar Pradesh's Rs 36,359 crore farm-loan is 2.6% of its GSDP, estimated the agency quoted in Mint in April, 2017 The 14th Finance Commission says fiscal deficits should not exceed 3% of state budgets.
22.1 million (67.5%) small or marginal farmers won't benefit from loan waivers
Owners of these shrinking farms find it difficult to use modern machinery and are often too poor to afford farm equipment. Manual labour increases costs, and size and output further limits access to loans and institutional credit.
The other 22.1 million farmers depend on moneylenders and relatives for borrowings, according to the 2011 agricultural census and the National Sample Survey Office's 2013 situation assessment survey of farm households, the latest available data.
Previous loan waivers did not stop farm suicides: NCRB data show
Telangana reported a similar trend. In 2014, when Telangana waived Rs 17,000 crore in loans to 3.6 million farmers, 1,347 farmers committed suicide in the newly formed state. By 2015, 1,400 suicides were reported.
'Moral hazard': Agricultural NPAs grow three-fold between 2009 and 2013
"Waivers undermine an honest credit culture... It leads to crowding-out of private borrowers as high government borrowing tend to (impose) an increasing cost of borrowing for others," the RBI governor said, calling for a consensus among states on loan waiver promises. "Otherwise sub-sovereign fiscal challenges in this context could eventually affect the national balance sheet."
After India's first major farm-loan waiver of Rs 10,000 crore in 1990-announced by a Janata Party government led by then Prime Minister V P Singh-it took almost nine years for banks to recover, the Economic & Political Weekly reported in April 2008.
Since the 2008 farm-loan waiver, agricultural NPAs rose three times, from Rs 7,149 crore ($1.2 billion) in 2009 to Rs 30,200 crore ($4.7 billion) in 2013, according to this 2015 study on NPAs in priority-sector lending in India's public and private banks.
These NPAs affect the credibility of lending institutions. Shares of banks fell 4% after Maharashtra announced its loan waiver, Business Standard reported on June 13, 2017. Further, with public-sector banks (PSBs) accounting for the major share of farm credit-52% in Maharashtra, followed by 32% from co-operative banks and 12% in private banks-these PSBs are "more vulnerable", said this 2017 Kotak Institutional Equities report.
While agricultural credit grew 547% over 10 years, rural road infra grew 10.5%
More recently, others have emphasised this point (here, here and here): It is clear a loan-waiver alone cannot solve India's agrarian crisis.
The data reveal a more-than-necessary focus on agricultural credit, as other fundamental problems remain unaddressed.
Over a decade to 2014-15, as institutional credit in agriculture grew 547%, from Rs 1.25 lakh crore ($19.4 billion) to Rs 8.45 lakh crore ($131.4 billion), rural road construction-which increases access and boosts agricultural income and productive employment-grew 10.5% according to this 2016 research paper.
Roughly 7% of India's total grain output, 10% of seeds and between 25% and 40% of fruits and vegetable-overall a third of farm harvest spoils-are wasted every year because there isn't enough storage and supply-chain infrastructure, according to the 2015 IJSR paper.
Irrigation, increasingly vital in an era of climate change, has failed Indian farming. No more than 47.6% of India's farms are irrigated, as IndiaSpend reported on June 8, 2017, and the decadal growth in net-irrigated area to 2010 was 0.3%, according to ministry of agriculture data.
These low investments eventually make farming expensive and prices volatile.
For example, despite a good harvest, tur (pigeon pea), an important pulse, today fetches 63% less than it did in December 2015 (Rs 3,800-4,000 per quintal compared with Rs 11,000 per quintal).
Since 2010, the cost of cultivating tur has risen by 78%.
To curb the impact of market fluctuations, this 2016 report by chief economic adviser Arvind Subramanian recommended improving the "procurement capacity"-or money available to buy farm produce-of states, lifting export bans, raising stock limits-which is how much produce traders can hold-and including "risks and externalities" while framing the minimum support prices (MSP) for various produce. For those commodities protected by the government's MSP policy-these include fruits and vegetables-the Radhakrishna committee recommended a price-risk mitigation fund, which would allow to hedge losses in market fluctuations.
"States which want to go in for these kind of schemes (farm-loan waivers) will have to generate them from their own resources," said Jaitley. "Beyond that the central government has nothing more to say."
Farmers Prep For March To Delhi After Haryana Told To Remove Roadblocks "How Can State Block...": Supreme Court To Haryana On Shambhu Border Crossing High Court Orders Removal Of Barricades At Shambhu Border Within 7 Days Shooter Had Trump's Face Right In Middle Of Crosshairs, Shows New Video Barack Obama Wants Joe Biden To Pull Out Of US Presidential Race: Report World's Largest Isolated Tribe Makes Rare Appearance In New Footage Israeli Strike Kills Field Commander In Elite Hezbollah Unit: Report Delhi-San Francisco Air India Flight Diverted To Russia After Engine Glitch Congress Does Not Want Manipur Like Situation In Tripura: Gaurav Gogoi Track Latest News Live on NDTV.com and get news updates from India and around the world.