In an attempt to snatch the farmers' votes, the UP Congress General Secretary, Priyanka Gandhi Vadra, in the Congress election manifesto called the 'Unnati Vidhan', which was released on February 9th, 2022, in Lucknow, the capital of Uttar Pradesh, promised to waive the loans of the farmers within 10 days of coming into power. She also promised to bring about a scheme to bring in order the stray cattle issue.
Other than this she said to put in place a sub quota for OBC- communities and to give the position of Home Minister to a Dalit.
The loan waiver promise has been the prime marketing strategy of political parties to keep farmers on their side and yet again the same trick has been played in the ongoing assembly election of Uttar Pradesh and that of other states. This might be a good method to gather votes, but most of the time these promises remains promises and are not fulfilled, but yet again the trick is played in the next election and then again the farmers are forced to fall for it, since, hope is their only choice.
Let us understand what waiver of loans for farmers actually is apart from gathering votes in elections, what it actually is for.
Farm loan waivers are state-specific programmes designed to assist peasants. Farmers may be unable to repay debts if the monsoon fails or if a natural disaster strikes. In such cases, rural misery typically leads states or the federal government to provide help in the form of debt reductions or outright waivers.
In essence, the federal government or states assume the responsibility of farmers and reimburse the banks. Only particular loan kinds, groups of farmers, or loan providers may be eligible for waivers.
Loan waivers, which were supposed to be a one-time deal. However, such schemes have become more common in India during the last two decades, signaling the country's ongoing agricultural crisis.
Though these requests appear more reasonable in light of the loss of livelihood due to the Covid-19 lockout, such loan waivers might be harmful to the banking system and credit culture.
The first known occurrence of peasant loans in mediaeval India goes back to the reign of Muhammad-bin-Tughluq (1325-51) in order to alleviate villagers' hardship.
In the face of insurrection and starvation, the following king, Firoz Shah Tughluq, wrote off the loans.
After independence, India only had two countrywide loan forgiveness programmes: in 1990 and 2008.
The VP Singh-led government implemented the first statewide farm-loan forgiveness in independent India in 1990. It cost the Indian government Rs 10,000 crore.
The Agricultural Debt Waiver and Debt Relief Scheme, which the UPA administration initiated in 2008, cost Rs 71,680 crore.
In India, more than 85% of small and marginal farmers own less than 1-2 hectares of land and lack essential farming inputs.
Crop output and production in India are heavily reliant on the monsoon.
Credit is a vital resource for farming households in this environment for carrying out crop production and covering consumption and daily-life needs.
Farmers take out loans to invest extensively in crops. Farmers will be trapped in debt if their harvest fails due to a lack of rain or inadequate market demand. Farmer suicides have increased as a result of this. As a result, forgiving farm debts helps to alleviate the humanitarian problem.
Loan waiver schemes will disrupt credit discipline since agricultural loan waivers are just a temporary solution and can become a moral hazard in the future.
This is because farmers who can afford to pay their debts may refuse to do so in the hopes of receiving a waiver.
Some farmers may take out loans even if they don't need them in the hopes of benefiting from the next loan forgiveness programme. This will have an impact on farmers who are in desperate need of funds.
Decreased Formal Access to Credit: Following the adoption of debt forgiveness programmes and the resulting losses to the banking industry, banks may be hesitant to lend to the agriculture sector in the future. As a result, farmers' reliance on the informal sector is increasing.
The 2008 farm-loan waiver resulted in a three-fold increase in non-performing assets for commercial banks between 2009–2010 and 2012–2013, according to a research by the Indian Council for Research on International Economic Relations.
The credit-deposit ratio, risk-weighted capital adequacy ratio, return on assets, and economic value of equity of banks are all affected as a result of this. This lowers bank ratings in particular and disrupts the operation of the credit market as a whole.
Banks take money from depositors and lend it to borrowers under a variety of contracts and agreements.
As a result, the bank's loss as a result of loan waivers is directly or indirectly against depositors' interests.
Furthermore, as custodians of depositors' funds, banks must prioritise the preservation of depositors' interests.
Loan waivers appear to give short-term respite to a small number of farmers, but they have a slim possibility of breaking the vicious cycle of indebtedness. Following the first round of all-India agricultural loan waivers in 2008, there is no solid evidence of a reduction in rural hardship. In the long run, the only way to keep farmers out of debt is to enhance their repayment ability by boosting and stabilising their income.
Long-term measures such as improving irrigation and cold storage systems, expanding crop insurance coverage, improving farm infrastructure, increasing tech-enabled productivity, and exposing the sector to market forces and free trade can benefit farmers in the long run.
Agrarian distress and farmer income will be addressed considerably more effectively if states take urgent action to enact long-overdue agricultural reforms.
Alternatively, instead of putting a restriction on the amount of loan waivers, waiving only a portion of the debt might be a better way to avoid moral hazard. There is also a need for creative participation, so that excess farm employees may be relocated to more productive areas, and farming can become more profitable and sustainable for everyone.
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