2.

In Budget 2008, the finance minister announced that over

Rs.60,000 crores of farmer loans will be written off. Following that
many state governments have also written off loans given to certain
sections such as weavers, fishermen, etc. adding burden on the
government exchequer. Some critics contend that this has had a
direct impact on the inflation of the country.
What, according to you, are the consequences of such
sops/concession being provided to certain sections of the society?
Do you agree with critics that loan write-offs had a direct impact on
the inflation of the country considering the inflationary trends in the
country post-write off? Give reasons, supported by facts and figures,
to support your views.

One of the highlights of India’s Union Budget 2008-09, was the

largest ever debt waiver and relief for small, marginal and other
farmers, to the tune of Rs 72,000 crore. As per initial estimates
given out by the Government, 39 million farmers received state-
supported relief from the waiver of their defaulted farm loans. This
waiver of farm loans has been lauded and criticized in equal
measure because of the consequences it brings with it.

Consequences:-

Pros

• First of all, farmers in India are in distress and considering the

increasing farmer suicides and their loss in farming over the
years, any kind of help to these farmers would be useful to
them.

• India, which had surplus food stocks for many years, has been
importing food grains in the recent past. If the trend
continues, it was feared hat the country would have to import
more food grains subject to the world prices. A populous
country like India cannot afford to be dependent on imports
for food grains. The loan waiver is one of the steps to improve
food production.
It would not only relieve the farmers from debt, but will also
boost our agriculture sector and self-sufficiency in food
grain production

• The major advantage is that the small and marginal farmers

can get new loans again

• In the current loan-waiver scheme fair records are available

for farmer's loans and since it only waives the loans of small,
marginal and other farmers, it has higher probability of
reaching the poor directly than any other scheme, which
involves money flow through government's bureaucracy.
 • According to Mr. Chitambaram, the scheme will strengthen
the system in the long run rather than weaken it. The banking
system would have weakened if Rs 60,000 crore had
remained unpaid or overdue. If the government can
successfully to write off these loans, providing this money to
the banking system, the banking system will have an
additional Rs 60,000 crore to lend. Then it will have a
multiplier effect and stimulate the economy.

Cons:

On the flip side this scheme is seen as rewarding wilful default and
distorting the credit and enterprise climate.

• Default is a very poor criterion for selection of beneficiaries for

relief. Moral hazard issues are compounded; with
undisciplined farmers being rewarded. This has caused a lot of
heartburn amongst the majority of farmers…those who have
paid back the loans, those who have borrowed from
moneylenders and those who have bigger farms.
• 40 million farmers amounts to almost half of India’s 90 million
farm households. But only a fraction of farmers have bank
loans, and only 5% of these are overdue.
• The role of the informal sector and moneylenders has been
completely ignored in this Scheme
• The scheme covers only crop loans, and farmers who have
invested in infrastructure would be discriminated against.
• The waiver continues to put more money in the hands of
farmers who have been in receipt of funds of government
through public procurement, etc. schemes. Such a waiver
scheme is bound to cause competitive claims for relief from
other sectors and other activities allied to agriculture.
• This massive write-off is a big let down for the banks and
weakens the banking credit system.
• The benefits of the loan waiver scheme would be very short-
term, and the same problem of indebtedness might arise in
the next season also. This is because the need for credit
would never end, and due of the lack of a long-term solution
in this approach, the productivity and the yield will not
increase and many farmers would continue to be defaulters.
Loan waiver is an attempt to cure the symptom and not the
disease.
• Loan waiver is likely to dampen the enthusiasm of banks to
expand agricultural credit. One of the reports mentioned that
the loss to commercial banks would be Rs. 11000 crore, the
amount towards unapplied interest, penal interest and other
charges that they would have to bear without reimbursement
from the government.
 • Worse, the scheme may end up compounding, rather than
alleviating, the woes of defaulters and heavily indebted
farmers, by making them eligible for fresh credit despite their
being unable to earn enough to repay their existing loans.
• The present scheme has a very limited number of
beneficiaries, the fact that the potential of such a huge
amount of money is enormous and many more could have
been benefited.
• "Give me the fish and I eat for a day. Teach me to fish and I
eat for a lifetime" This quotation is very apt in this particular
instance where government is not looking for a permanent
solution to farmer's crisis and may not stimulate investment
and trigger growth

A better solution would have been spending a portion of this amount

on developing infrastructure , providing education, quality
inputs ,food storage facilities and increasing the minimum support
price to help farmers to stand on their own feet.

Loan waiver to farmers may increase inflation

The waiver may have offered some relief to the country’s

agricultural community. But the industry and the academia feel the
Rs 60,000 crore that the Centre reimbursed to the banks has led to
an increase in domestic inflation. In order to write off debts the
government will have to increase the supply of money in the
economy.

The additional money lend by banks, may have contributed to the

rising inflation post write off

The Centre could be able to reimburse the money due for banks for
the waiver only by printing additional currency, which would lead to
heavy inflation. It remains as yet unclear as to how exactly the
government intends to fund the scheme for there is no provision in
the budget, nor is there any indication as to what it would do to the
fiscal deficit.

There are apprehensions over the farm credit waiver as the sources
of funding remain unclear as also the overall package for the
agricultural sector. There will be a huge liquidity gap created
because of the farm credit waiver which needs to be met with some
extra provisions.

He asked how the government would provide funds for the waiver of
farm loans from tax receipts, when the total tax receipt was only Rs
one lakh crore. Even If the government would waive farm loans in
instalments, it would not be possible to provide huge funds.

The government's Rs 60,000 crore farm loan waiver also had an

impact on investor sentiment relating to banking stocks.

A section of the FMCG and consumer product manufacturers, there

are prospects of the rural market opening after the increase in the
purchasing power of farmers after debt waiver and relief. As the
there will be no pressure on re-payment of loans and the payment
schedules will no longer be a factor for rural consumers, they will
tend to spend on consumables and durables. In the rural market,
there will be a multiplier effect and there will be demand for the
basic FMCG categories like soaps and detergents, rather than high-
end categories like shampoos. With Government’s policy on rural
employment generation, there will be more money spent on such
FMCG products

With the extension of the National Rural Employment Guarantee

Scheme (NREGS) to all 596 rural districts, the demand for
foodgrains will go up.Nearly two-thirds of the income of the poor is
spent on food and the purchasing power enhancement conferred by
the NREGS would help to raise food consumption

However, what will endure is the soaring rate of inflation caused by

foodstuff shortages and higher prices of items such as naptha.

(There is a more material question of banks facing an increase in their NPAs (non-
performing assets) as a result of the “directed” write-off unless they are already
provided for or there is a special dispensation that such loans covered under the
mandated “write-off” be not included under NPAs. Such a dispensation by the RBI
would be contrary to all financial prudence. When the loans are written off, there has
to be a supply of resources from the Government either by way of a grant or loan. A
loan would mean an increase in liability, which would lead to the banks being equally
worse off. Reputed chartered accountants and lawyers have pointed out that it is not a
question of liquidity only but also of banks being solvent. To the extent to which the
Government asks banks to write off the loans, there will definitely be a write down in
the profitability of the banks. The Rs 60,000 crore may look small compared to the
Government’s Budget. But when it comes to individual banks, the implications may
be quite different. The government's reported move may also defy macro-level fiscal
prudence. Considering the huge volume of total non-performing assets related to
agriculture, the funds needed for such a measure would be in excess of Rs 32,000
crore (Rs 320 billion).If the rescheduled farm loans are also taken into the reckoning,
this figure might touch a mind-boggling Rs 90,000 crore (Rs 900 billion). Doling out
such mammoth sums would, obviously, adversely affect the availability of funds for
other pressing developmental needs. As it is, the government is subventing 2 per cent
of interest on crop loans of up to Rs 2 lakh (Rs 200,000) disbursed by the banks at 7
per cent interest, instead of the usual 9 per cent.)