Loan waiver is not the solution(GS 2,Government Policies and interventions)
Context- We need to revisit the credit policy with a focus on the outreach of banks and financial inclusion.
Introduction- Since Independence, one of the primary objectives of India’s agricultural policy has been to improve farmers’ access to institutional credit and reduce their dependence on informal credit.
Government Initiative-1.As informal sources of credit are mostly usurious, the government has improved the flow of adequate credit through the nationalisation of commercial banks, and the establishment of Regional Rural Banks and the National Bank for Agriculture and Rural Development.
2.It has also launched various farm credit programmes over the years
- the Kisan Credit Card scheme in 1998,
- the Agricultural Debt Waiver and Debt Relief Scheme in 2008,
- the Interest Subvention Scheme in 2010-11,
-and the Pradhan Mantri Jan-Dhan Yojana in 2014.
-It is encouraging to see a robust increase in institutional credit from ₹8 lakh crore in 2014-15 to ₹10 lakh crore in 2017-18.
3.Of this, ₹3.15 lakh crore is meant for capital investment, while the remaining is for crop loans. Actual credit flow has considerably exceeded the target.
4.The result is that the share of institutional credit to agricultural gross domestic product has increased from 10% in 1999-2000 to nearly 41% in 2015-16.
However There are large no. of farmers who are out of formal mode of institutional credit.
-While the flow of institutional farm credit has gone up, the rolling out of the farm waiver scheme in recent months may slow down its pace and pose a challenge to increasing agricultural growth.
- At the global level, studies indicate that access to formal credit contributes to an increase in agricultural productivity and household income. However, such links have not been well documented in India.
Various report suggested-1.48% of agricultural households do not avail a loan from any source. Among the borrowing households, 36% take credit from informal sources, especially from moneylenders who charge exorbitant rates of interest in the 25%-70% range per annum.
Why Formal Credit-1.Compared to non-institutional borrowers, institutional borrowers earn a much higher return from farming (17%)
2.Return form the borrowing of formal sector is significantly higher than the borrowing of informal sector.
3. Access to institutional credit is associated with higher per capita monthly consumption expenditures.
4. Access to formal institutional credit also tends to enhance farmers’ risk-bearing ability and may induce them to take up risky ventures and investments that could yield higher incomes.
Conerns-1. A negative relationship between the size of farm and per capita consumption expenditure (a proxy for income) further underscores the importance of formal credit in assisting marginal and poor farm households in reducing poverty.
2. While 63.4% of agricultural investments are done through institutional credit, landless, marginal and small farmers’ investment demand is met through informal sources to the tune of 40.6%, 52.1%, and 30.8%, respectively.
3. Those farmers, who are residing in the less developed States ,are more vulnerable.
Why Loan waiver is not helping Farmers?-
- Clearly, a major proportion of farmers remain outside the ambit of a policy of a subsidised rate of interest, and, for that matter, of loan waiver schemes .
- This sop provides relief to the relatively better off and lesser-in-number medium and large farmers without having much impact on their income and consumption.
- To what extent this relief measure can help bring farmers out of indebtedness and distress remains a question. This is because farmers’ loan requirement is for non-agricultural purposes as well, and often goes up at the time of calamity when the state offers minimal help.
- It should be understood that writing off loans would not only put pressure on already constrained fiscal resources but also bring in the challenge of identifying eligible beneficiaries and distributing the amount.
Way Forward-1.The anomaly of major farmers remain outside of loan waiver scheme can be rectified only if the credit market is expanded to include agricultural labourers, marginal and small land holders.
It is, therefore, important to revisit the credit policy with a focus on the outreach of banks and financial inclusion.
2. The government along with the farmers’ lobby should desist from clamouring for loan waivers as it provides instant temporary relief from debt but largely fails to contribute to farmers’ welfare in the long run.
3.Government must direct sincere efforts to protect them from incessant natural disasters and price volatility through crop insurance and better marketing systems.
A diversion of money towards debt relief, which is in fact unproductive, will adversely impinge on state finances, may dissuade lending by the banks, and hence prove counterproductive to the government’s broader mandate of doubling farmers’ income by 2022-23.