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On This Day - Jun 16, 2017
Inefficacy of Farm Loan Waivers

Successive governments have tried to address the malaise afflicting the Indian farmers with band-aid measures. They have just looked for the symptoms with without getting to the root of the problem. Farm loan waivers continue to remain the most popular measure to win the rural vote bank. This is a sad irony as it does not resolve the actual problems faced by small and marginal farmers. And at the same time adversely impact the asset quality of banks.

The Uttar Pradesh farm loan waiver of over Rs 300 billion was used as a poll plank to win the 2017 state elections. And it's now threatening to turn into a contagion. With the Maharashtra government recently approving a farm loan waiver of the same size, nearly half a dozen states are following suit. These loan waivers would collectively burn a hole of over rupees three trillion in the state exchequer. But its efficacy in addressing the problems remains clouded as only one third of the small and marginal farmers actually have access to formal channels of financing. This means that a majority still depend upon money lenders and relatives. So the farm loan waiver will not benefit them at all.

Moreover, this short-term bailout fails to address structural issues faced by farmers such as lack of adequate irrigation and better prices for farm produce. At the same time, it spoils the credit discipline translating into higher slippages for public sector banks already burdened with bad loans of over Rs 7 trillion.

Source: Economic Times

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