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mains Test Series 2018
Indian Farm Sector and Loan Waivers
Jul 25, 2017

[GS Paper III: Issues related to Direct and Indirect Farm Subsidies and Minimum Support Prices]

Recently, States like Uttar Pradesh, Maharashtra, Punjab and Karnataka rolled out farm loan waiver schemes as a measure of immediate relief and response to farm distress. The demand for such measures is rising in other States as well. But, loan waivers suffer from several disadvantages.

Why the demand for loan waivers?

  • Low scale and low productivity of Indian agriculture: About 85% of the operational landholdings in the country are below 2 hectares and 67% farm households survive on an average landholding of less than one hectare. 
  • Low Landholdings: According to the Agriculture Census, the total number of operational holdings in India is numbered 138.35 million with an average size of 1.15 hectares. Of the total holdings, 85 per cent are in marginal and small farm categories of less than 2 hectares.
  • Limited access to irrigation: More than half of the area under cultivation is rainfed.
  • Low agriculture income and highly distorted non-farm source of incomes. Rising expenses on health, education, social ceremonies and non-food items put additional financial demand on farm families.
  • Weather and market risks: Crop failures due to weak monsoon or other natural phenomenon like droughts or floods and limited availability of Minimum Support Price (MSP) on selective crops adds to the distress. 
  • Non-institutional borrowing: The NSS surveys on Investment and Debt (NSS-I&D) states that the loans from non-institutional sources (which involve high interest rate) is rising faster than from institutional sources pointing to the fact that much of the growth in household demand in rural India has been debt-ridden and not supported by growth in income.
  • Failure of crop insurance programmes to recover farmers’ investments in most cases due to lack of accurate farm-level data.

Drawbacks of loan waivers

  • It covers only a tiny fraction of farmers. According to National Sample Survey Organization- Situation Assessment Survey of Agricultural Households (NSSO-SAS) 2012-13, 48% of the agricultural households did not have any outstanding loan.
  • It provides partial relief to the farmers as about half of the institutional borrowing of a cultivator is for non-farm purposes. 
  • It excludes agricultural labourers. 
  • It erodes the credit culture and has negative multiplier effect on the economy. 
  • It 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. 

Impact of Farm Loan Waivers on State Finances

  • Loan waivers inflict a major cost on the budgets of State governments since banks will have to be compensated by the governments for the losses they incur. 
  • Further, the offer to waive off loans could end up increasing the cost to governments by encouraging willful default by farmers, leading to the problem of moral hazard. 
  • In its recent report on the States’ finances, the RBI pointed at the worsening financial health of states, with the gross fiscal deficit to GDP ratio averaging 2.5% in the last five years (from 2011-12 to 2015-16), compared with 2.1% during the previous five-year period.
Note: Moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. In financial market, it occurs when the borrower knows that someone else will pay for the mistake he makes.

Sustainable solutions

  • The sustainable solution to indebtedness and agrarian distress is to raise income from agricultural activities and enhance access to non-farm sources of income. 
  • Diversion of cultivators from agriculture to non-farm jobs, improved technology, expansion of irrigation coverage and crop diversification towards high-value crops are appropriate measures for raising productivity and farmers’ income. 
  • Agrarian distress and farmers’ income will be addressed much better if States undertake and sincerely implement long-pending reforms in the agriculture sector like establishing a national common market, developing the agro-processing sector, etc.

PT Facts

  • National Sample Survey Organization (NSSO) headed by a Director General, works under the aegis of Ministry of Statistics & Programme Implementation and is responsible for conduct of large-scale sample surveys in diverse fields on All India basis.
  • Marginal Farmer means a farmer cultivating agricultural land up to 1 hectare, while a small farmer is one who cultivates agricultural land of more than 1 hectare and up to 2 hectares.
  • Rainfed agriculture occupies about 54% of country’s net sown area, and accounts for 40% of the total of food production.


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