The Loan Waiver Scheme - Arthashastra

Farmers Loans and related Politics

"A small Debt make a Man your Debtor A large one your Enemy."

The recent Loan Waiver Scheme of the various state government in India was a disaster for the countries economy and society.

What are the intentions for the loan waiver 

The intentions for the loan waiver Scheme are- :
Told-  Saving the poor farmers from the debt trap.
Un-Told-   political gains

Why there is need for loan waiver? 

- Two successive years of below-normal rainfall FY14 and FY 15 leading to low production and good rainfall in FY 16 resulting in bumper crop and reduce in price.
- Farm produce came under pressure because of demonitisation because of distress sale of crop especially perishable.
- Government motives to counter inflation.

Problem with loan Waiver 

  • Reach-  It will not cater masses said by NITI Aayog member and Agriculture policy expert Ramesh Chandra."in poorer state 10-15% farmers and 25% in normal state. Because it cater most connected not most needy.
  • Political Stunt- Experts says that before lok sabha elections it is a way to woo the rural population.
  • Budget Deficit- Urjit Patel former RBI Chairman said that" this type of loan waiver leads to higher expenditure then Budget Revenue thus stretching fiscal deficit and stearing money away from needed function such as capital spending", may breach FRBM act.
  • Banks Affected- As the time between Pronouncing a scheme and implementation of the same have a huge time gap so between that their is a cash crunch in the bank.
  • Credit Deciplin-  People who got the waiver have expectation of future waiver so the repayment of credit Deciplin will fall .
  • Crowding out effect-  Increase in borrowing by states to wave farm loan would increase demand for fund from bank or financial market leading to increase in Interest rate as a result crowding out of private borrowing. 
  •  Discourage lending- The bank will not lend to the person whose loan are waived and concider him as a defaulter so the Government should focus on improving credibility of farmers.
  • Consumption- Study point that small farmers use money  from loan waiver for consumption activities and not for investment leading to increase in inflation. 

Solutions of loan Waiver 

  • Insurence - Government should Provide insurance to farmers on land and Increase penetration of land insurance. Provide Job insurance to land less labourer from the scheme like MGNREGA.
  • Subsidy - Instead of loan waiver the Government should shift to cash subsidy because cash subsidy would help the needy of required thing in required amount but the waiver would help the connected farmer. 
  • Income Support- The government should shift from Price Support ( MSP) to Income Support  I.e. from MSP to strive toward a certain income benchmark. Because price support are
              - Costly
              - In effective
              - Distortionary

  •       Productivity- Focus on improving productivity by bringing awareness toward GM crops and other machines.
  • Market- we should increase and improve crop market.
  • Nonfarm - Farmers should be incentives to invest in a nonfarm activity like animal husbandry as to maintain their income.
  • Infrastructure - Government should focus on agriculture infrastructure as combining expenditure of loan waiver is more than the total expenditure on atriagricul infrastructure, eg- National center for cold chain Development has estimated Rajasthan total requirement for storing milk, fruits, and vegetables in a warehouse is 74889 tonne costing 5985cr appropriate half then the loan waiver amount.
  • Party fund- the party should pay from their party fund, not tax fund.  


Loan waiver is needed in an emergency situation. It is a short term solution until we improve the credit culture, Increase farmer Income, Agriculture Productivity and increase in value chain.

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