Farm loan waivers could reflect poorly on credit culture

It also means public capital formation in agriculture may go for a toss

Updated: Jul 18, 2017 11:07:57 AM UTC
At the fiscal level, waivers are worrying because they take focus away from capital formation.
Image: Munish Sharma/ Reuters

The slew of farm loan waivers announced recently would set back state finances by at least Rs 85,000 crore, spread over the next few years. More importantly, the moral hazard that this act spawns, and the consequent diminution of credit culture, can lead to a rise in agricultural non-performing assets (NPAs) at banks.

To be sure, agriculture has deserved much attention across stakeholders given that it contributes 17-18% to India’s GDP and employs close to 50% of the population. At the fiscal level, waivers are worrying because they take focus away from capital formation. States that have gone for waivers have seen agri capital formation as a percent of GDP drop over a period time. Agricultural sops have always been a large part of agri-linked expenditure of states such as loan waivers, interest subventions, subsidies and payouts to families of farmers who commit suicide.

The genesis
The first farm loan waiver in India was announced in 1990. In the past decade alone, close to Rs 1 lakh crore of waivers were funded by the Centre and states. A chunk of this – Rs 52,500 crore – was announced by the Centre in February 2008.

The central scheme, popularly known as Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS), benefited nearly four million farmers. Among states, Tamil Nadu, Andhra Pradesh, Telangana and Maharashtra have a history of offering such waivers.
Subsidies on fertilisers and crop procurement are the other large payouts – worth a humongous ~Rs 1.9 lakh crore just last fiscal. Interest subvention is an additional Rs 13,000 crore payout every year. First introduced in fiscal 2007, the interest payouts by the Centre have risen 3 times from less than Rs 4,000 crore in fiscal 2011 to now.

All this has significantly impacted the ability of governments to spend on capital formation in agriculture, which stands at close to 8% of total gross fixed capital formation in India, and less than half compared with agriculture’s share of GDP. Further, capital formation as a percent of GDP in agriculture has fallen over the past few years with the share of public investments coming down from above 20% in FY05 to below 16% by FY16.

Investments in areas such as storage infrastructure have been insufficient, evident from the 25-30% wastage of perishables such as fruits and vegetables. Areas like improvement in soil quality and ground water restoration have also seen insignificant progress.

Rotting of food grains in warehouses is endemic. And falling ground-water levels in Punjab, Rajasthan and Haryana indicate lack of initiatives to tap rain water.
To be sure, we have seen fast-tracking of delayed major irrigation projects, and sharper focus on minor ones but there is a long way to go. For example, only 13% of the micro-irrigation potential has been achieved despite there being a centrally sponsored scheme since 2005. And when the weather fails, it becomes a double whammy along with systemic inefficiencies.

The sustainable way ahead
Materially reducing post-harvest losses, better market price for offtake, higher financial inclusion at affordable rates, and better water management are the long-term solutions to ensure farm prosperity. Indeed, policies are facilitating better and more transparent market pricing as e-mandis proliferate and farmers get direct access to markets skirting usurious brokers.

Enabling higher crop insurance penetration, fast-tracking of irrigation projects, and sharper focus on micro irrigation can lower the weather risk and that, in turn, would reduce the risks for lenders.

India also needs sharper focus on market infrastructure and financial inclusion. Surveys indicate rates of interest for loans from financial institutions are way lower than from other sources. According to the AIDIS Survey in 2013, only 10% of loans outstanding from institutions had interest rates over 15%, whereas it was a stunning 71% from non-institutions. So better access to institutional credit for small and marginal farmers, who are subjected to extortionate interest rates, would be critical to financial inclusion.

How waivers scuttle the capital formation agenda
Uttar Pradesh, Maharashtra, Punjab and Karnataka account for close to 30% of the Rs 9.3 lakh crore institutional farm credit outstanding book last fiscal. Other states that are yet to see a clamour for waivers include Tamil Nadu and Madhya Pradesh. If they are pushed too, then total waivers would cross Rs 1 lakh crore, equal to what was spent on waivers in the past decade.

The impact of this would be staggered given the experience of disbursements for past waivers spread over 3-4 years. Some states may not feel the complete pinch if other avenues are used for funding the waivers. For example, Uttar Pradesh has spoken about issuing ‘Kisan Rahat’ bonds. But that still would raise worries over its finances given that its fiscal deficit was already a high 4% last fiscal. While Maharashtra and Punjab have not explicitly mentioned how they would be funding the waivers, their fiscal situation is not very different. Uday bonds have already added to their fiscal stress. Maharashtra’s fiscal deficit, which stood at Rs 50,000 crore last fiscal, was targeted to be reduced to half in FY18 but may now see a jump. Implementation of GST may be a bright spot for states with higher tax collections preventing a sharp rise in fiscal deficits.
The biggest structural concern, however, is the impact of waivers on credit culture, and the moral hazard because they could persuade farmers elsewhere to hold back loan repayments hoping for a waiver.

Various data show farm-linked gross NPAs of banks have doubled from under 2% in fiscal 2009 to over 4% by 2012 (the last year when the central government made payments under the ADWDRS scheme). Though the number has since been flat, the situation is set to change for the worse. That would be detrimental to the efforts of improving the share of institutional credit, estimated to be less than 20%, for marginal farmers.

The denouement of all this is obvious: Loan waivers not only bring state finances under pressure, they also weaken the case for institutional finance to agriculture.

- By Hetal Gandhi, Director, CRISIL Research

The thoughts and opinions shared here are of the author.

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