Relevance : GS Paper III
Problems with loan waivers
- They adversely affect the repayment discipline of farmers.
- They do not led to increases in investment or productivity in agriculture.
- A farmer’s access to formal sector lenders declines due to loan waivers.
Critical assessment of above arguments
- Farmers are most disciplined in their repayment behaviour.
- There is no evidence that loan waiver led to a rise in default rates among farmers.
- Investment or productivity have not been the official objectives of loan waivers.
- If loan waivers shrink access to formal credit, the culprits here are banks.
Arguments for loan waivers
Just like firms, farms also need a reduction of debt burden, followed by fresh infusion of credit, when their economic cycle is on a downturn.
Not a panacea
Access to India’s rural banks is skewed in favour of large farmers. Thus, the benefits of loan waivers accrue disproportionately to large farmers.
The solution
- Waiver schemes should ensure universal coverage.
- Waivers should cover both the formal and informal sources of debt.
- Kerala Farmers’ Debt Relief Commission Act serves as an excellent model.
- Agrarian distress needs urgent policy attention such as raising productivity, reducing costs of cultivation, enhance public investment, crop insurance, etc.
