Monday, March 03, 2008

On farm loan waiver package

We all have seen the details of the farm loan waiver package announced by the Finance Minister in his budget speech on 29th February.

Some more details are:

There are four crore small and marginal farmers who are unable to repay their crop loans to the banks.

It will be financed out of the fisc through a combination of cash and bonds. The fisc is expected find the resources from its overflowing tax receipts and disinvestment proceeds.

The last major write-off was in 1990.

Why is a waiver bad or why it misses the point?

A complete waiver vitiates the lending climate and does damage to farm and loan discipline. It penalizes borrowers who have honoured their loan commitments and creates a moral hazard since farmer-borrowers are likely to assume future dues will also be written off.

Small farmers face two main challenges: meeting their input needs and dealing with the weather risks to their crops. Addressing these challenges is not on the radar of the government.

Another basic problem farmers face is getting a fair price for their produce. Nothing is uttered about this also in this budget.

The announcement by the finance minister seems to have got its definition of small farmer all wrong. Marginal farmers (less than 1 hectare) and small farmers (1 to 2 hectares) is an incorrect classification. It should have taken the irrigated and un-irrigated areas and arid and semi-arid areas into account while classifying farmers. Without this, a large measure of the farmers in distress will remain untouched by the waiver.

The scheme misses the point that majority of the farmers are in the clutches of village money lenders. The scheme doesn’t touch them at all.

What suggestions could you give?

The long term solution is to make farming profitable. The way ahead in this direction is – investment in irrigation and roads, allowing farmers to sell outside mandis and provision of information on seeds and agricultural practices.

Redefine small and marginal farmers duly taking into account the nature or type of their farm.

Rein in the village money lender by fixing a cap on the amount of interest that he can charge on the loans given by him.

Related links:

A very good debate that appeared in today’s ET on the issue can be found here.

Any debate about alleviating farm distress cannot be complete without inputs from the doyen of Indian agriculture – M.S. Swaminathan. Read his excellent article that appeared in today’s Hindu here.