Farm loan waiver

FEB 18

Mains   > Economic Development   >   Indian Economy and issues   >   Agri financing


  • Major political parties have promised farm loan waivers in the run-up to the assembly elections in Goa, Punjab, Uttar Pradesh, Manipur and Uttarakhand in February/March 2022.


  • India has a long history of loan waivers. The first ever nation-wide farm loan waiver was announced in 1990 and cost the state Rs 10,000 crore.
  • Over the next decade, despite the Reserve Bank of India’s warnings, several states have resorted to farm loan waivers.
  • In 2008, the Central government announced one of the largest debt waiver schemes in history. The ‘Agricultural Debt Waiver and Debt Relief Scheme’ waived Rs 52,000 crores, spread across 237 districts and reached 30 million farmers.


  • Reduce farmer distress:
    • Subsistence level farming, dependence on monsoon and poor price realization make farmers default on their loans, sometimes driving them to take the extreme step of suicide. A loan waiver addresses this indebtedness.
  • Promotes formal banking:
    • Loan waiver schemes provide a boost to formal banking activity in rural India. For instance, the number of bank accounts availing direct finance for agricultural activity saw a significant boost post the farm loan waiver in 2008.
  • Encourage investment:
    • Not having to pay back loans increases liquidity in farmers’ hands and when old outstanding debt is settled, farmers can access fresh loans from institutions. This promotes investment into agriculture.
  • Political gains:
    • Between 1987 and 2019, political parties lost elections only four out of 21 times following a promise/implementation of farm loan waiver. With more than 80 per cent success rate, these waivers offer a rather robust formula of electoral success.


  • Perpetuates a vicious cycle:
    • Loan waivers do not address the factors that cause indebtedness, like low productivity, successive crop failures or inability to get remunerative prices. Hence, in time, the condition of farmers who benefitted once under a loan waiver are indebted again and driven to a point of needing another waiver.
  • Affects credit culture:
    • Loan waivers have affected the credit culture with many borrowers withholding repayment, in anticipation of a loan waiver. This adversely affects the credit history of borrowers and their future prospects of availing fresh loan for agricultural purposes.
  • Enhances NPAs:
    • Loan waivers lead to a rise in non-performing assets (NPAs). This is evident from the high level of Gross NPA of 8.44 per cent as on March 31, 2019 in the agriculture sector.
  • Reduces rural lending:
    • Farm loan waivers make banks shift their credit away from agriculture and rural areas to less risky sectors and regions. This causes difficulties in obtaining formal credit and force farmers to shift to informal sources.
  • Corruption and leakages:
    • The Comptroller and Auditor General’s report following the 2008 loan waiver program exposed rampant corruption and exclusion and inclusion errors in the identification of beneficiaries.
  • Benefits only a small number of farmers:
    • An RBI report says that at most 40 per cent of India’s small and marginal farmers are covered by formal credit. The rest rely on informal sources and do not benefit from the waiver.
    • Also, most states are writing off loans in a phased manner, which means thousands of farmers are yet to benefit from the waivers.
  • Fiscal burden:
    • Farm loan waivers pose a serious threat to the state exchequer. For instance, Punjab’s 2017-18 loan waiver cost the exchequer Rs 10,000 crore, which was 9 per cent of the state’s GDP that year.
  • Diversion of funds from productive areas:
    • Waivers eat into the capital expenditures of the states. By diverting expenditures on key departments like education, energy and water resources, state governments are crowding-out investments that are vital for a state’s future.
    • For instance, in Uttar Pradesh, capital outlay as a percentage of state GDP decreased from 5.7 per cent in 2016-17 to 2.8 per cent in 2017-18.


Through a farm loan waiver, a state government is not only trading a state’s future capacities for the present, but is also not able to adequately address the present. More sustainable and long-lasting measures in the farm fields are needed:

  • Invest in farm research and development:
    • According to calculations by economist Ashok Gulati, every Rs. 1 invested in farm research and development boosted farm income by Rs. 11.2. A similar amount spent on fertilizer subsidy added only ?0.88 to farm GDP. Hence, efforts are needed to promote agri R&D.
  • Wider Coverage of Crop Insurance:
    • Efforts are needed to create a comprehensive insurance coverage for major crops, simplify the insurance application procedure and reduce delays in settlement of claims.
  • Reduction in the reliance on informal sources of credit:
    • Enhancing the scale of finance could help in reducing their reliance on informal sources, improving pricing of their produce and thereby increasing their income.
  • Diversification of Crops:
    • Farmers, particularly in areas which are rain-fed, need to move away from crops which are water-intensive and adopt cropping patterns more suited for the agro-climatic conditions of the region.
  • Collective farming:
    • As per the latest Agriculture Census, the average size of operational holdings in India is 1.08 hectares in 2015-16. This small size hinders investment like mechanization in agriculture. Hence, collective farming systems, like the communes in China, needs to be looked into.
  • Technological Advancements:
    • Better irrigation practices, improved seeds, mechanisation wherever possible and use of innovative farming practices can help reduce costs and improve yields.
  • Increasing Farmers’ direct access to agricultural markets:
    • There is a need to increase cooperatives and farmer producer organisations (FPOs) in the states. Farmers can also be trained in post-harvest processing, packing and marketing which would help them fetch more for their produce.
  • Plug leakages in schemes:
    • Governments must ensure that the benefits reach only the needy. Direct benefit transfers, Aadhaar linking, limiting the waivers only to loans issued by branches located in rural areas etc are some measures that can be adopted in this regard.

Together with these measures, steps to promote greater awareness among farmers about their entitlements under various government schemes would fortify the agrarian economy and reduce the clamour for farm loan waivers.


Q. Farm loan waivers to ameliorate the problems faced by farmers can provide only a temporary relief and not a lasting solution to rural indebtedness. Discuss?