Need to cut uncompensated government mandates imposed on PSBs: Raghuram Rajan

Stating that farm loan waivers inhibit investment down the line, former Reserve Bank of India (RBI) Governor Raghuram Rajan on Friday said he has written to the Election Commission against the farm loan waivers as poll promises. Rajan also said that uncompensated government mandates have been imposed on public sector banks (PSBs) for a long time, but said privatisation of public sector banks may not be a panacea.

According to Rajan, loan waivers not only inhibit investment in the farm sector but put pressure on the fiscal of states which undertake farm loan waiver. In every state election during the last five years, loan waiver promise made by one political party or other. The recently concluded assembly election in five states, agriculture loan waiver and increasing minimum support price (MSP) of cereals was again part of the manifesto of some of the political parties.

Also, loan waivers, as the RBI has repeatedly argued, vitiate the credit culture, and stress the budgets of the waiving state or central government.

According to a 2017 report by the RBI, farm loan waiver amounting to Rs 88,000 crore likely to be released in 2017-18 by seven states, including Uttar Pradesh and Maharashtra, may push inflation on a permanent basis by 0.2%.

Agriculture currently contributes just about 15% to the national output and about 50% of the population directly or indirectly depends on it for employment.

Farmer distress is a real and pressing problem, as evidenced by the protests currently taking place in various parts of the country.  In the recent past, widespread demands have been heard for farm loan waivers amid continuing agrarian distress.

Drawbacks of loan waivers:

Firstly, it covers only a tiny fraction of farmers. The loan waiver as a concept excludes most of the farm households in dire need of relief and includes some who do not deserve such relief on economic grounds.

Second, it provides only partial relief to the indebted farmers as about half of the institutional borrowing of a cultivator is for non-farm purposes.

Third, in many cases, one household has multiple loans either from different sources or in the name of different family members, which entitles it to multiple loan waiving.

Fourth, loan waiving excludes agricultural labourers who are even weaker than cultivators in bearing the consequences of economic distress.

Fifth, it severely erodes the credit culture, with dire long-run consequences to the banking business.

Sixth, the scheme is prone to serious exclusion and inclusion errors, as evidenced by the Comptroller and Auditor General’s (CAG) findings in the Agricultural Debt Waiver and Debt Relief Scheme, 2008.

Lastly, schemes have serious implications for other developmental expenditure, having a much larger multiplier effect on the economy.

What needs to be done?

For providing immediate relief to the needy farmers, a more inclusive alternative approach is to identify the vulnerable farmers based on certain criteria and give an equal amount as financial relief to the vulnerable and distressed families.

The sustainable solution to indebtedness and agrarian distress is to raise income from agricultural activities and enhance access to non-farm sources of income. The low scale of farms necessitates that some cultivators move from agriculture to non-farm jobs.

Improved technology, expansion of irrigation coverage, and crop diversification towards high-value crops are appropriate measures for raising productivity and farmers’ income. All these require more public funding and support.

The magic wand of a waiver can offer temporary relief, but long-term solutions are needed to solve farmer woes. There are many dimensions of the present agrarian crisis in India. The search for a solution, therefore, needs to be comprehensive by taking into consideration all the factors that contribute to the crisis. Furthermore, both short- and long-term measures are required to address the numerous problems associated with the agrarian crisis.

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