Tale of Farm Loan Waiver Scheme in India

Posted in Finance Articles, Total Reads: 250 , Published on 01 August 2017
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Agriculture Sector is considered as primary sector of the Indian Economy as a large portion of the population is dependent on agriculture and allied activities for their survival. According to survey conducted by NSSO and other organizations, almost 50% of the population is employed in agriculture and this sector contributes 17 % to the GDP of the Indian Economy. Taking into account all the factors affecting agriculture, it is learnt that in our country, the farmers have to toil more and in spite of this, they do not yield good returns for their produce due to which their condition remains vulnerable. On news channels and print media, every year we find thousands of farmers committing suicide which gives an insight into the pitiful state of our farmers.

Many steps have been taken to address the issues of farmers - modernized machines and equipments have been developed which reduce the physical burden of farmers, various types of loans have been suggested which enable a farmer to carry out agricultural activities even during shortage of funds. In the past few years, looking at the challenges prevalent in the agriculture sector, many inhabitants of rural areas have migrated to urban places in search for jobs in manufacturing and service sector. Due to this, the number of people employed in agriculture sector has sharply reduced. But we are wary of the fact that agriculture sector fulfills the basic requirement of ‘Food’ for the population. Agriculture Sector is considered as ‘Prime-Mover’ of the economy and is also categorized as ‘Priority-Sector’ for financing various activities.


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An insight into farm loan waiver scheme

Banks provide following kinds of credit facilities for farmers:

- Kisan Credit Cards

- Loans for establishing cold storage facilities

- Loans for poultry farming, sheep & goat rearing

- Loans for dairy and milk products

- Loans for purchase of tractors and farm equipments

Agriculture in India is categorized as Priority Sector and the loans are sanctioned at a lesser rate of interest. The income generated from farm sector and other activities attached to it also enjoy exemption from income tax besides other benefits of subsidy.


There are plethora of challenges in the farm sector - scanty rainfall, poor monsoon, attack from pests, non-availability and ignorance to the use of fertilizers, lack of modernized farm equipments. Due to these issues, farmers who avail credit facility from financial institutions are unable to repay the loans on time. This results in loan becoming NPA (Non-Performing Asset).


Such NPAs of agriculture loans are waived by centre as well as state governments to reduce the financial hardships of the poor farmers. Recently, many political parties in the state governments have initiated waiver of farm loans in their respective states. Famers in many states of the country may be seen protesting for waiver as well as a long-term solution to their problems. Waiver may not be a solution to the put an end to the ever increasing problems faced by the agrarian population as in spite of a good harvest; they do not reap benefit of a fair price in the market. Their situation still remains vulnerable and the cost of waiver poses a heavy burden on the treasury of states and as well as centre. According to economists, if all political parties keep promising of loan waiver to famers, then by 2021, the cost to be borne by the exchequer may reach a whooping Rs. 2,57,000 Crores, which would be 2% of the GDP!!!


Problems prevalent in the Agriculture Sector

The problems affecting the harvest of the famers have been critical- If Produce is more, it leads to hoarding due to which food prices fall in the market and the farmer has to sell the yield at a lower price, if produce is less, it is again a big loss for the farmer. If rainfall is heavy, it destroys the crops due to water-logging and other harmful effects; if rainfall is scanty, the crop dries and results in bad harvest.

Farmers avail credit facility from many institutional as well as non-institutional sources. The institutional sources include banks and financial institutions while non-institutional sources comprise money-lenders and other non-regulated intermediaries who do not favor waiver scheme of the government. Availing credit facility from such sources and defaulting on them puts the farmer in great financial strain and paves way for incidents of suicides which raise alarm bells about the distress of the Indian farmers.

The central government has submitted a figure of 12000 suicide cases of farmers per year since 2013 to the Hon’ble Supreme Court. The suicide cases were not only due to crop failure but other depressing conditions in the sector.

In agriculture sector, problems are prevalent not only due to weather conditions but also many strategic factors like lack of cold storage and transportation due to which many perishable goods are rendered waste leading to loss to the farmers. States and centre have devised a concept of Minimum Support Price for the farmers to decide the minimum price of the harvest that every farmer should get, irrespective of the quality.


Pros and cons of farm loan waiver scheme

Farm Loan Waiver may be a solution to the problems of the farmers but it does not assure of the non-occurrence of similar situations in future. Further, waiver poses certain threats to the economy as a whole and the effects could be beyond imagination. On one hand, government is focusing on providing housing, employment, framing regulations for wages and remuneration to protect the interest of migrants and laborers, and on the other hand, it is giving a nod to loan waiver schemes in which a huge booty, amounting to crores of rupees would be required and whose end result could be devastating for the economy.

The present scenario of loan waiver caters to KCC only, ignoring all the agriculture term loans and various other types of loans. The centre point of movement being carried out in different states is that different states have varied percentage of exposure to agricultural activities. Certain states yield good harvest owing to favorable climatic conditions while certain states have a poor yield due to non-favorable factors for agriculture. Hence the number of bad agricultural loans varies across states.

Secondly, states have their own budget for planned and non-planned expenditure based upon which developmental activities are carried out. Variety of exposure to agriculture loans and waiver will pose varied degree of burden on the states, since it has been specified by the centre that states should bear the burden of waiver from their own treasury.

Looking at this issue from the perspective of banks, the scheme will not be favorable for the banks. The balance sheet of banks are already stressed sue to alarmingly high levels of NPA and other factors. Although the amount of waiver shall be borne by the states, but it will strain the bank’s books of accounts as well.

Types of Banks

Outstanding Agriculture Credit

Commercial Banks

9.57 Lakh Crores

Regional Rural Banks

1.45  Lakh Crores

Co-operative Banks

1.57  Lakh Crores


The table above highlights the amount of agriculture loans outstanding in various types of banks. Among them, 61% i.e. 7.75 lakh crore are crop loans (to be waived) and 4.84 lakh crores are term loans.

According to RBI Governor Dr. Urjit Patel, farm loan waiver distorts wise credit culture of the banking industry and affects the national balance sheet. The farmers who have the ability to repay loans on time are inspired to default on loan repayments with a hope of announcement of such schemes in future. Hence the money which could have been utilized in other developmental activities gets diverted in waiving loans, a part of which does not deserve to be waived at all. Moreover, waiver schemes strains the pocket of tax payers since the tax payers’ money is utilized for waiving of loans.


In spite of all such measures, the farmers of the country are still in pitiful state. Year-by-year and almost during every elections, loans are waived in heavy amount but the problems surmounted in the rural sector remain unresolved which is a cause of great concern.

Another aspect to this is that India is a developing economy and the amount of money required for developmental activities is being provided by different nations in the form of loans, MOU, partnership etc. Waiver schemes puts immense burden on the exchequer both at the central as well as state level. This poses a risk of downfall in the entire economy. The Reserve Bank of India has expressed concern over stress on fiscal condition and risk of increasing inflation due to implementation of such schemes.

Farm loan waiver throws light on one more aspect of the society that many farmers, whose credit-worthiness is not good take loans from money lenders and other private financers instead of institutional sources like banks. Such sources do not maintain formal paper-work and other documentary evidence of the credit disbursed. In the event of announcement of such schemes, many corrupt practices crop up which dilutes the purpose of schemes.

The country needs special public investment to ensure sustainable development of the farm sector. Problems like reduction in irrigated land, reduction in level of water-table, ground water pollution have become a cause of concern. According to a World Bank Study conducted in 2014, the amount of farm loan waived by the Congress Party in 2008 did not result in significant increase in productivity and investment in the successive years and led to negative effects in states where the amount of loan waived was high.


Looking at the problems of the agriculture sector from a bird’s eye view, it can be inferred that our country needs investment in the areas of irrigation, storage, market and R&D. The sector has immense potential to take the economy on growth trajectory; the prime requirement is to provide modernized farm equipments and other necessary inputs to the farmers to yield good results in Indian as well as International market. If the investment equivalent to the amount of loan waived is invested in developing and modernizing the farming sector, situations of loan waiver might not occur in future and farmers would not have to end up their precious lives. This step may not be favorable to many political parties who support such schemes for their vote bank but this will certainly be in favor of the economy and its stakeholders. This should be the aim of policy makers as well as the elected leaders to take such steps which lead to permanent solution of the problem instead of temporary and partial solution.


This article has been authored by Aprajita Gupta


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