Urjit R Patel: Agricultural debt waiver - efficacy and limitations
Opening remarks by Dr Urjit R Patel, Governor of the Reserve Bank of India, at the Seminar on
"Agricultural Debt Waiver - Efficacy and Limitations", Mumbai, 31 August 2017.
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Ladies and Gentlemen,
On behalf of the Reserve Bank of India, I warmly welcome you and thank you for accepting our
invitation to join us today in this seminar.
1. In the recent period, farm loan waivers have engaged intense attention among the farming
community, policy makers, academics, analysts and researchers. On the one hand, there is a
gamut of issues that have intensified the anguish of our farmers. In this context, farm loan
waivers have brought forward the urgency of designing lasting solutions to the structural malaise
that affects Indian agriculture. On the other, there are concerns about the macroeconomic and
financial implications, how long they will persist in impacting the economy, the possible
distortions that they could confront public policies with, and the ultimate incidence of the financial
burden.
2. Let me, in a modest way, try to eclectically address both sides of the debate. India's agrarian
economy is the source of around 15 percent of GDP, 11 per cent of our exports and provides
livelihood to about half of India's population. The importance of the sector from a macroeconomic
perspective is also reflected in a significant flow of bank credit to finance agricultural and allied
activities relative to other sectors of the economy. Outstanding bank advances to agriculture and
allied activities have risen from about 13 per cent of GDP originating in agriculture and allied
activities in 2000-01 to around 53 per cent in 2016-17 (Chart 1). In real terms (adjusted for
inflation measured by the GDP deflator), the growth of bank credit to agriculture and allied
activities accelerated from 2.6 per cent in the 1990s to 15.4 per cent during 2000-01 to 2016-17.
3. Much of this credit flow has been propelled by the policy thrust on expanding credit to
agriculture, especially through priority sector lending (PSL) stipulations. Public sector banks and
private banks are required to lend 18 per cent of annual net bank credit (ANBC) or credit
equivalent amounts of off-balance sheet exposures, whichever is higher, to agriculture. Under
this carve-out, 8 per cent is prescribed for small and marginal farmers. Even foreign banks with
20 branches and above have to achieve this target within a maximum period of five years starting
from April 1, 2013 and ending on March 31, 2018. The share of outstanding advances to
agriculture and allied activities in total priority sector advances has increased from 32.5 per cent
in 2000-01 to 43.2 per cent in 2016-17 (Chart 2). Thus, without exaggeration, it is safe to say that
financial flows to agriculture have been generous.
4. The Government has also undertaken several measures to compensate for the adverse terms
of trade and the inert institutional architecture confronting agriculture in order to improve the
profitability of crop production. The Interest Subvention Scheme has been running for a decade
under which banks and cooperative institutions extend short term crop loans of up to 3 lakh to
farmers at a concessional rate of 7 per cent. Timely repayment is incentivised by an additional
subvention of 3 per cent. The scheme also encompasses other benefits, including post-harvest
loans for storage in accredited warehouses against Negotiable Warehouse Receipts (NWRs) for
upto six months for Kisan Credit Card (KCC) holding small and marginal farmers at a
concessional rate of 7 per cent in order to avoid distress sales. During 2017-18, the Central
Government will provide interest subvention of 5 per cent per annum to all prompt payee farmers
for short term crop loans of up to one year. Many farmers will thus have to effectively pay only 4
per cent as interest on loans contracted from these institutions. In case farmers do not repay the
crop loans in time, they would still be eligible for interest subvention of 2 per cent. On June 14,
2017 the Government earmarked a sum of 20,339 crore for this purpose for 2017-18 as against
the provision of 15,000 crore originally made in the Union Budget (Table 1). During 2016-17, the
volume of short term crop loan lent stood at 6,22,685 crore, surpassing the target of 6,15,000
crore.
6. Despite the sizeable volume of subsidised and directed credit flows as well as the various
fiscal incentives, Indian agriculture is beset with deep seated distortions that render it vulnerable
to high volatility. It has perennially been characterised by low investment, archaic irrigation
practices, monsoon dependence, fragmentation of land holdings and low level of technology.
Lack of property rights and low initial net worth of farmers add to the constraints. Consequently,
considerable flux in output and prices is common, imposing large losses on farmers and
potentially imprisoning them in a circle of indebtedness with disturbing frequency. Therefore, in
the absence of coordinated and sustained efforts to put in place elements of a virtuous cycle of
upliftment, loan waivers have periodically emerged as a quick fix to ease farmers' distress.5.
Earlier, the Union Budget 2014-15 had put in place a scheme under which five lakh Joint Liability
Groups of 'Bhoomi Heen Kisan' (landless farmers) will be financed through the NABARD in order
to augment flow of credit to landless farmers cultivating land as tenant farmers, oral lessees or
share croppers and small/marginal farmers as well as other poor individuals taking up farm
activities, off-farm activities and non-farm activities. The experience of catalysing bank credit
flows to agriculture and expanding the panoply of subventions begs the question: Are we
substituting credit for other policy interventions? Indeed, this issue prompted, in 2014, RBI's
Expert Committee to Revise and Strengthen the Monetary Policy Framework to recommend a
revisit of the need for subventions on interest rates for lending to agriculture.
7. A brief history of farm loan waivers in India may be in order. The first major nationwide farm
loan waiver was undertaken in 1990 and the cost to the national exchequer was around 10,000
crores, which works out to 50,557 crores at current prices using the GDP deflator. The second
major waiver was under the agricultural debt waiver and debt relief scheme (ADWD) of 2008
amounting to 52,000 crores (0.9 per cent of GDP) or 81,264 crores at current prices using the
GDP deflator. Unlike the 1990 scheme that aimed at providing blanket relief to all farmers up to a
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certain loan amount, the 2008 scheme waived debt for certain classes of cultivators . In 2014,
Andhra Pradesh and Telangana announced farm loan waiver of 24,000 crores and 17,000
crores, respectively. Beginning with Tamil Nadu in 2016, domino effects have spread in 2017 to
several states and the total cost of loan waivers announced amounts to around 1,30,000 crores
(0.8 per cent of GDP). I am sure that the proceedings today will dwell upon the details
characterising each scheme. Therefore, I will move on.
8. The pros and cons of agricultural debt relief have been widely debated and literature has
evolved around the theme. Alongside beneficial effects in terms of clearing the debt overhang of
farm households, negative side effects in the form of faulty targeting of beneficiaries and resulting
discrimination, incentivising wilful defaulters, and erosion of credit discipline have been cited. I
am pleased to note that several luminaries driving the evolution of these ideas are present here
today. Rather than attempting an uninformed evaluation, I am personally looking forward to the
guidance of experts present here on various issues that intermingle around the subject.
9. Let me now turn to the other side of debate - the implications for macroeconomic conditions
and policies. The first impact of any loan waiver is on the balance sheet of lending institutions, be
they formal or informal. This is inherent in the inevitable lags, in the timing of impact and the
arrival of compensation from the government. In this interregnum, the quality of assets
deteriorates and bridge provisions crowd out new loans. In the second round, loan waivers
impact the state of public finances in the form of higher than budgeted revenue expenditure. This,
in turn, has to be financed by additional market borrowings which pushes up interest rates, not
just for the States but for the entire economy. A collateral damage is that private borrowers are
crowded out of the finite pool of investible resources as the cost of borrowing rises. Even if the
loan waiver is accommodated within budgetary provisions, it will force cutbacks in other heads of
expenditure. Experience has shown that the most vulnerable category is capital expenditure. In
turn, this will entail deterioration in the quality of expenditure and inter alia lead to adverse
implications for productivity as asset forming investment, including for the sector itself - e.g.,
irrigation works, cold storage chains etc., - is foregone. If capital/infrastructural constraints are
binding, a reduction in capital expenditure for the sector that would have benefitted from this
expenditure could even be inflationary as costs - including time value/opportunity cost of delays
and material damages - go up as a result of capacity constraints becoming even more acute and
attendant "congestion charges". If, on the other hand, budgetary provisions are exceeded, higher
spending and widening of the fiscal deficit have, as experience has shown, inflationary
consequences, and possible spillovers that could undermine external viability (the twin deficit
argument). Also, research points to adverse welfare effects because, ultimately, loan waivers
involve a transfer of resources from tax payers to borrowers. Consumption redistribution effects
have also been reported.
10. As you would have noted from these initial remarks, farm loan waivers have stirred up
considerable passion and polarised opinions. While in no way detracting from the acute distress
that farmers face with every disruption in crop cycles, it is important to recognise that there are
externalities that spill over beyond the farm sector. Eventually, other economic agents and other
parts of the economy get affected. How can these spill overs be minimised? How do we defray
the incidence of the burden on tax payers? From a policy perspective, what needs to be done to
move away from palliatives in the form of debt relief and into a more fundamental solution that
enhances welfare all around? Many elements of this optimal approach are well known - crop
insurance, infrastructure, irrigation, technology-enabled productivity improvements, and, opening
up the farm economy to market forces and open trade. The Government's initiative to establish a
nation-wide market for agricultural produce, through eNAM, the Pradhan Mantri Fasal Bima
Yojana, the Pradhan Mantri Krishi Sinchai Yojana, the Paramparagat Krishi Vikas Yojana and the
national drive towards financial inclusion for all are important initiatives in this direction. The
coming to fruition of these initiatives holds the potential of achieving the mission of doubling
farmers' income over time. We need to ensure that their benefits percolate down to all the
intended recipients.
11. I will refrain from either prejudging or influencing the rich discussions that are expected to
occupy your minds during the rest of the day. I am sure that amidst the heat and dust, this
seminar will shine light on the multi-faceted discourse on farm loan waivers. So I will stop here
and wish you all success in your deliberations.