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Farm Loan Waiver – An Illusion

, August 28, 2020, 0 Comments

Agricultural debt is one of the dominant problems in rural India today and relief from debt assumes great significance to the agricultural borrowers. India had seen two big farm loan waivers- one in 1990, an agricultural debt relief scheme totalling U$5.5 billion. In the same year, a similar scheme was announced by the Haryana Govt, waiving U$126 million of farm loans by banks and cooperatives out of which U$89 million were due to commercial banks (Shylendra ,1995).  In 2008, the Indian Govt. announced one of the largest debt waiver schemes- Agricultural Debt Waiver and Debt Relief Scheme waiving U$13 billion spread across 237 districts and reaching 30 million farmers (Kanz, 2012).

A complete waiver was given to small and marginal farmers (holding land between 1 and 2.5 hectares). Farmers with land holding above 2.5 hectares were given 25% waiver. In the recent years, since the announcement of demonetisation in November 2016, several state governments announced farm loan waivers. The first to kick off this trend was Uttar Pradesh, where loan waiver was announced as a response to the promise made in the election campaign of assembly polls of March, 2017. Since then, all big states with significant farming presence that went to polls announced farm loan waivers.

The demand for farm loan waivers emanates from various factors and vulnerability of agricultural households to several income shocks is well known. The vulnerability results from (i) the income stream from agriculture remaining highly uncertain (ii) the weather shocks creating significant risks leading to high level of distress and (iii) use of agricultural insurance being limited.

In India, the challenges are multi-fold as the policy response to income shocks has often been delayed, poorly implemented and many a times driven by political benefit.  Moreover, several innovative practices, government intervention of minimum support price as an incentive to produce more, acted as a catalyst to improve production level. However, with the innovative practices, cost of production increased, but due to lack of efficient chain of supply management, farm price level continued to be non-remunerative.  Thus, the three broad compelling factors leading to the growing demand for farm loan waivers are- (a) Declining profitability in agriculture (b) Policy failure and (c) increased dependency on agricultural credit

Though, farm loan waivers are seen as an immediate solution, these waivers have huge repercussions.  Apart from the macro economic instability, it has a significant adverse impact on the repayment behaviour of the borrowers and lending of credit institutions. Investment and consumption decisions of borrowing households depend on the types of penalty faced by the borrower in the event of default (Chakraborty and Gupta, 2017). It has been seen, with stricter enforcement, households are forced to invest on productive purposes which aids in repayment. On the contrary, with some relaxations ensured, farmers tend to use borrowed resource for unproductive purposes. Evident from the table below, share of farm expenditure on farm business post loan waiver of 1990 decreased to 43% in 1991-92 from 51% in 1981-82.   The share of expenditure on fam and non- farm business continued to decline post 2008 loan waiver scheme. The consistent growth in rural expenditure is witnessed in residential plots & buildings.

farm-loan-waiver-marketexpress-inThe repayment pattern of the borrowers, and the government debt waivers schemes have in many ways contributed to the inadequate reach of institutional credit.  According to a report of Standard and Chartered Securities, “The problem with agricultural credit lies in rising non-performing loans as farmers expect more debt waivers”.

Further, various survey-based studies also identified that debt relief, dis-incentivises the banking structure to provide credit to small and marginal farmers. Post 1990 & 2008, fresh loans were given to the relatively better off agricultural households while the credit disbursement to small and marginal farmers, further reduced (Shylendra, 1995).  Thus, with the frequent farm loan waivers, the objective of the government to make institutional credit accessible to all farmers gets hampered.

Farm loan waivers can therefore cause more harm than benefit to the already vulnerable agricultural household. An obvious alternative is increasing profitability of the agricultural households. Niti Ayog Strategy Document identifies three key approaches that can improve profitability of farmers. This includes.

  • Modernize agriculture – Adoption of appropriate technology, methods etc. to improve productivity, efficiency and diversification
  • Policy environment – Create a policy environment that enables income security for farmers; encourage participation of private sector in agriculture development and promote emergence of ‘agri-preneurs’
  • Value chain & rural infrastructure-Creation of modern rural infrastructure and integrated value chain.
The opinions expressed in this article are the author’s own and do not reflect the view of MarketExpress – India’s first Global Analysis & Sharing Platform or the organization(s) that the author represents in his personal capacity.


  1. Shylendra (1995), “Farm Loan Waiver impact Study” Artha Vijnana
  2. Kanz, Martin (2018), “What Does Debt Relief Do for Development? Lessons from the Largest Household Bailout in History “, The World Bank, Washington.
  3. Tanika Chakraborty and Aarti Gupta (2017), “Efficacy of Farm Loan Waiver Programs”, RBI