May 20, 2024


Is waiving farm loans an effective policy?

Election season means people from different communities see what the parties and candidates have to offer. Every party understands they need to cater to a broad spectrum of voters. That includes farmers. They’re the backbone of the country’s agrarian economy and have a set of demands.

Among them is a waiver of their loans. Farmers across the country, particularly medium and marginal landholders, spend years under crippling debt. Several states have taken it upon themselves to introduce farm loan waiver schemes. At the central level, it’s been quite barren. Does waiving off farm loans make economic sense? Is it fundamentally sound policymaking?


In 1931, the Indian Central Banking Enquiry Committee Report stated that “in all parts of India, the cultivator is steeped in indebtedness”. Fast forward decades later to 2007, when another committee stated that indebtedness needed the most attention among all the ills that plague the agricultural sector. It illustrated that the sector’s economics hadn’t changed all that much since the issue persisted.

Indebtedness is a symptom of economic or financial stress faced by a farmer. A study funded by the National Bank for Agriculture and Rural Development (NABARD) from a couple of years ago showed that over 80% of respondents agreed that income and production-related problems were bigger than indebtedness. The study was conducted in Punjab, Maharashtra, and Uttar Pradesh. A fall in income was due to poor productivity and lower market prices for their produce.

Per the Reserve Bank of India (RBI), a farm loan becomes a non-performing asset (NPA) when the instalment of interest and principal remains overdue for two crop seasons for short-duration crops and one season for long-duration crops. In case of a default, a farmer’s access to fresh credit stops and only resumes once they pay their dues.

Some estimates showed that an average agricultural household has debt equivalent to 60% of their annual income. A National Sample Survey showed that the average debt was ₹74,100 from July 2018 to June 2019.

The consequences of mounting debt are devastating. In 2022 alone, over 11,000 farmers took their own lives due to indebtedness. State governments initially waived farm loans during droughts or floods. Over the years, the situation has become more dire, and the waivers have continued with increasing frequency.

The issue gained increasing prominence during the farmer protests in 2020-21 and recently this year. Farmers have always faced substantial hurdles in accessing credit. The procedure to get a loan is lengthy and complex, which alienates small and marginal farmers. A landless or tenant farmer might not have the necessary documentation and are left out. Combine these with rising production costs, poor infrastructure, and less-than-fair prices, and you get a vicious cycle of poverty. Many have made the case that waiving off farm loans is necessary, while others say it’s a useless tool.

VIEW: It’s a helping hand

While the issue of Minimum Support Price (MSP) continues to be debated, the least that farmers deserve is to be free from debt. Besides, giving farmers a fair shot is needed to ensure they can continue farming without worrying about repaying loans. Also, several other alternatives, like suggesting organic farming and including more technology in the agriculture sector haven’t solved the problem.

Farm loan waiver has been done before by the Centre on two occasions. The first time was under the Agricultural and Rural Debt Relief Scheme in the 1990-91 Budget. The next came in the 2008-09 Budget under the Manmohan Singh government. The latter benefitted 3.7 crore farmers and seemingly helped the UPA return to power. So, there’s precedence.

While governments at the Centre have been hesitant, the same can’t be said for states. They’ve frequently used farm loan waivers, particularly before an election. Among the first was Haryana in 1987. Then came other significant ones like the DMK government in Tamil Nadu in 1996 and Kerala’s Farmers’ Debt Relief Commission Act, 2006. Even if they’re temporary measures, loan waivers are necessary to ensure farmers get a fair shot.

COUNTERVIEW: It’s a bad idea

Most economists agree that there are better policies than farm loan waivers. A 2021 NABARD study on farm loan waivers showed that an indirect effect was lower agricultural credit targets and lending in the subsequent year. It concluded that the ultimate burden of a loan waiver was on the farmer. What farmers need is something better than loan waivers. Easier access to credit at lower costs and better crop insurance schemes for starters.

Loan waivers are basically a political tool used by state governments. There’s a reason why state budgets have become messy, and several governments at the Centre have stayed away from loan waivers. It’s bad economics. They can potentially incentivise borrowers to default on their dues. States that implement loan waivers often see an increase in NPAs, which disrupts their credit discipline. There have also been instances where banks have been hesitant to lend to farmers in states with a history of repeated loan waivers.

Former RBI governor Dr Urjit Patel stated that government delays in compensating financial institutions for waivers lowered their liquidity to issue loans and negatively impacted their balance sheets. For state governments, the cost runs into the tens of thousands of crores. Some of these waivers were done when state budgets were already stressed due to the pandemic. The underlying issues aren’t being tackled but are glossed over with loan waivers. It’s less than a band-aid solution.

Reference Links:

  • The past, present and future of farm loan waivers in India – CNBC TV 18
  • Income and debt account of India’s farmers | EXPLAINED – India Today
  • Are farm loan waivers really so bad? – Ideas for India
  • Seeds of Debt: How loan waivers affect the farmers and the economy – Forbes
  • Farmers’ Protest: Why were farm loans waived only twice since Independence? Experts see a vicious cycle – Moneycontrol
  • Final burden of farm loan waiver on farmers: NABARD Deputy MD – The Financial Express
  • The truth about farm loan waivers – The Financial Express

What is your opinion on this?
(Only subscribers can participate in polls)

a) Waiving farm loans is an effective policy.

b) Waiving farm loans is not an effective policy.


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