In today’s Finshots, we explain how farm loan waivers work and their impact on the economy.

The Story

A few days ago, the Puducherry government made a partial payment of around ₹2 crores to Agriculture Co-operative Credit Societies.¹ This was just the first instalment of the ₹12 crores in farm loans it had waived off between 2016 and 2022.

And farm loan waivers in India are hardly new. They actually go way back to the 14th century. Back then, Muhammad Bin Tughluq, the Sultan of Delhi, was one of the first to lend a helping hand to farmers with loans during tough times.² Later, his successor, Firoz Shah Tughluq, forgave these loans altogether when famine and unrest shook the land.

Just like that in modern-day India too, farm loan waivers have become almost routine. The first major one came in 1990 under the Agricultural and Rural Debt Relief (ARDR) program, which waived loans up to ₹10,000 per farmer, distributing nearly ₹7,800 crores in relief.³

Although the ARDR is long gone, loan waivers have remained a go-to move for politicians. They pop up in election manifestos almost all the time. And while the central government has only waived farm loans twice since independence, state governments often resort to them just before or during elections. If they win, they keep their word by forgiving part or all of the debt or interest that farmers owe.

But here’s something you need to know. This loan waiver is not always a blanket benefit for every farmer. Political parties often pick which groups of farmers qualify — may be small and marginal farmers, or those who’ve taken loans from credit cooperatives. They then create a formula to decide which loans and how much of them can be waived off. And if they come into power, they set aside part of the budget to gradually reimburse banks, credit cooperatives or any other financial institutions for the losses they face because of these waivers.

The goal is to offer farmers relief from rising input costs, poor crop yields, bad weather and similar issues. And of course, it’s also a way for politicians to win farmers’ votes.

But do these waivers actually benefit farmers, you ask?

Well, not really.

A SBI research report from 2022 shows that farm loan waivers aren’t exactly the magic fix for boosting crop productivity, agricultural investments or even wages.⁴

The reason is simple. Over 80% of farm loan waivers in some states went to “standard” loan accounts — basically, loans that were being repaid on time and weren’t overdue. Or as the banks classify them, they weren’t turned into non-performing assets (NPAs) or loans that are overdue for 90 days or more. And despite state governments waiving nearly ₹3 lakh crores in farm loans over the past decade (about 1% of India’s current GDP), only about half of the eligible farmers have actually received these waivers, while the rest are waiting.

Now, you might think that this could just be a one-off finding.

But if you look at the past audits, like the one done by the Comptroller and Auditor General (CAG) on the FY09 farm loan waivers, you’ll see that about 9% of waivers went to ineligible recipients, while 14% of eligible farmers missed out the benefit altogether.⁵

And that sort of tells us that farm loan waivers don’t always reach the farmers who genuinely need them the most. Instead, these waivers might be doing more harm than good for the credit culture. When farmers see repeated waivers, they might think, “Why bother repaying if another waiver might come along?” Over time, even farmers who can repay might stop doing so, banking on the chance of more waivers in the future.

This indirectly kicks off a chain reaction for banks and financial institutions too. Because you see, when the government announces a loan waiver, many farmers simply stop repaying and those loans then turn into NPAs. And unless the government steps in with compensation, these loans remain NPAs and that ties the banks’ hands. They’re stuck with unpaid loans and can’t extend fresh credit to these farmers.

The end result? Rising NPAs hurt credit growth. In fact, over the past decade, farm loan waivers across 18 states have driven up agricultural bank NPAs by 30–85%.⁶ And recently, in election-bound states, public sector banks like Union Bank, Central Bank of India and SBI reported agricultural NPAs close to 25%, compared to just about 4% for private banks.

This also makes banks hesitant to lend to farmers who genuinely need credit. And that obviously isn’t a good look for the economy, which not only struggles under the weight of NPAs but also gets heated up by inflation.

If you’re wondering how, think about it this way. When banks are weighed down by NPAs, and the government steps in to cover those unpaid farm loans, it’s tax revenue that’s footing the bill. Money that could’ve gone towards things like infrastructure, healthcare or education ends up going to loan waivers instead. This strains the governments’ budgets, pushing them into a deficit — meaning they spend more money than they bring in.

To cover that gap, governments borrow more, which does two things. One, it adds more money into the system without real growth backing it, fueling inflation. And two, as the government competes with the private sector for funds, it makes credit access harder for private businesses. Interest rates go up, making borrowing expensive and slow economic growth.

That’s also exactly why economists and even the RBI (Reserve Bank of India) aren’t fans of farm loan waivers. They can mess with the RBI’s ability to manage the economy properly. Take this interesting example from a column by Tamal Bandopadhyay. He mentions how the RBI stepped in when a senior minister from an unnamed Indian state tried to push bankers into giving loans to farmers. The catch? The minister wanted the loans to be approved without checking the farmers’ credit scores. And this was after a political party had stopped loan recovery agents from collecting payments from farmers who had defaulted.

So who really benefits from farm loan waivers? Not farmers. Not the economy. But political ambitions of parties trying to win votes.

But does that mean there’s no better way for political parties to help farmers?

Actually, there is.

If politicians genuinely care, they could invest more in agricultural research and development (R&D), which was just a measly 0.4% of India’s GDP in FY23.⁷ That number’s been dropping over the years, and it could be holding back real agricultural progress. To give you a sense of scale, countries like Brazil invest about 1.8% of their GDP in agriculture R&D, while China invests 0.6%.

So yeah, if political parties promised to ramp up this investment and provide direct income support to farmers until these efforts start paying off, it would probably lead to real, long-term benefits — not just for them or the farmers, but for the entire economy.

Until then…

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Sources: The Hindu [1], Business Standard [2] [7], The Economic Times [3], State Bank of India [4], CNBC TV18 [5], Livemint [6]

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