June 12, 2017

This is an archived blog post from The Acorn on Medium.

The floodgates of farm loan waivers are now fully open. Narendra Modi promised it in Uttar Pradesh. There, and in Maharashtra, another BJP-governed state, farm loan waivers have been announced. It is likely that Madhya Pradesh will follow suit. The BJP has embraced the demand for farm loan waivers in Karnataka, where it is in the opposition. It’s not just the BJP that has appropriated a programme that the Congress-led UPA govenrment championed. The judiciary has too: the Madras High Court has ordered the government to waive farm loans in Tamil Nadu.

As another general election approaches in 2019, a national farm loan waiver is a distinct possibility. A general amnesty could cost Rs 300,000 crore according to a finance ministry official quoted in the Calcutta Telegraph. (States are looking at Rs 30,000 crore — Rs 114000 crores of loan waivers).

The fiscal consequences of these loan waivers are dire, well-known and completely ignored. Loan waivers wreck the moral culture of repayment by penalising those who repay and rewarding those who don’t. The fiscal deficit will cause inflation and reduce the space for essential capital expenditure to fuel future growth. And so on.

The political consequences are considered very promising, if not a trump card. The public narrative is also compelling: when the government tolerates bad debt from the corporate sector to the tune of Rs 600,000 crore, surely poor farmers have a more deserving case for loan waivers.

Where do we go from here?

The best solution is to stop general loan waivers — to anyone, not just farmers.

Given the moment, it’s unlikely that politicians and public opinion will heed such arguments. We need to think of ways how the loan waiver mindset can be managed to cause least damage and the fever allowed to come to an end on its own.

The problem is: once governments finance loan waivers from their budget we lose sight of the problem. This means that neither the government nor public opinion has any incentive to fix the underlying problems that cause agrarian distress in the first place. A better way to handle farm loan waivers would be to finance them out of a special purpose fund, specifically set up for the purpose. Let this be financed through revenues both from an explicit state government cess and from tax-exempt donations from businesses and individuals.

And let this fund transparently publish its accounts every year. If we can create special purpose vehicles to manage and restructure banks’ non-performing assets, why not something similar for loan waivers?

I think this is a good idea, although it comprises of several bad ideas. Earmarking taxes is a bad idea. A cess is a bad idea. Of course, general amnesties for borrowers is a bad idea. Even so, it is a good idea to try to mitigate the damage badly implemented loan waivers can do.

Furthermore, instead of loan waivers” it is better to implement rural cash transfers” to all farmers in affected districts, so as not to discriminate against those who’ve paid back loans.

Making the costs explicit, and preventing people from forgetting them will inject discipline into the public discourse. Currently, it’s unclear what happens to the Krishi Kalyan Cess that we pay to the Union government. It should be discontinued. (Update: this cess currently raises around Rs 10,000 crore and is spent on crop insurance and interest subsidy on crop loans.)

Let state governments levy this cess. It would be good for citizens of India to know that the cess they are paying really helps distressed farmers in their own state.

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