DMPQ: Farm loan waiver has become a populist tool. Do you think loan waiver is the ultimate solution? (Economy)

After the recent Assembly elections, the new governments in Rajasthan, Madhya Pradesh and Chhattisgarh announced farm loan waivers. According to SBI Research, around ₹70,000 crore will be spent on farm debt waivers till May 2019.  Rising costs, drop in income and increasing incidence of indebtedness among small and marginal farmers manifested in a spate of suicides over the years lead to implementation of farm loan waiver. But it is certainly not a ultimate solution because:

  • Study shows that farm loan waiver is not the answer.
  • There are evidences on the ineffectiveness of the agricultural debt waiver and debt relief scheme.
  • Loan waiver scheme did not have any positive impacts on household savings, credit uptake from banks or investments.
  • Economic theory suggest that waiving debts via such a scheme will lead to debt overhang.
  • A farm loan waiver benefit only those farmers who have access to formal credit which is just 30%.
  • Farm loan waiver adversely impacts the credit culture and the behaviour of borrowers.
  • A NITI Aayog study had also highlighted the fact that in some States, about three-fourths of the farm loans were being used for consumption instead of meeting agricultural needs.



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