Farm Loan Waivers in India: An Election Tool

Author: Neha Chauhan (Commentary)

Editor: Soumya Singhal


The Electoral Promise of Farm Loan Waivers

Farmers and other agricultural stakeholders make up a significant portion of the voting population. Therefore, their issues remain an essential part of the electoral discourse. Farm loan waivers appear to be a favourite pre-election announcement among political parties in response to the growing agrarian distress.

The 2021 National Statistical Office report recorded almost 10 crore agricultural households in India. At the same time, more than half of these agricultural households are reported to be in debt. Farmers’ indebtedness is not a new phenomenon and has been at the centre of the agrarian crisis for many years. As per the latest data from the National Crime Records Bureau [NCRB], 10,281 persons involved in agriculture died by suicide in the country in 2019. Data collected by the NCRB in 2014 noted ‘bankruptcy or indebtedness’ to be the primary reason behind suicides among farmers.

In the run-up to the 2022 Uttar Pradesh Legislative Assembly Election, the Indian National Congress announced to waive all farmers’ debts within ten days of forming the government. The Samajwadi Party released its poll manifesto titled ‘Samajwadi Vachan Patra’ before the same election. In its manifesto, besides the different benefits promised to the farmers, the party also committed to making all farmers in the state debt-free by 2025. Similarly, Aazad Samaj Party (Kanshiram), in its pre-election promises, assured to waive all farm loans if it came into power in Uttar Pradesh. 

Announcements related to farm loan waivers close to the election date have been observed in other states as well. The Congress government in Punjab decided to waive loans of farmers up to Rs 2 lakh in debt before assembly elections. Before the same election, the National Democratic Alliance promised to waive the debts of farmers with up to five acres of land in its election manifesto. Similarly, in its vision document for the 2018 Karnataka Legislative Assembly Election, Bharatiya Janata Party announced a crop loan waiver of up to Rs 1 lakh, including loans from nationalised banks and cooperatives. 

Evidently, political parties in India turn to farm loan waivers as a potential solution to agriculture woes, especially close to elections. In this context, it becomes pertinent to analyse the effectiveness of these loan waivers as a policy instrument. 

Gaps and Limitations of Farm Debt Waiver Schemes

Farm loan waiver policies ignore the structural factors that have led to the widespread agrarian distress in the economy. Farming in India continues to be risky with no proven profits. The Situation Assessment of Agricultural Households and Land and Holdings of Households in Rural India, 2019 report by the National Statistical Office highlights the low income levels of farmers. According to the report, the average monthly income per agricultural household in 2018-19, where the net receipt was calculated considering only paid out expenses, was Rs 10,218. The monthly income reduced to Rs 8,337 when the net receipt was calculated considering paid out and imputed expenses. This monthly income roughly translates into a per-day income of Rs 278. This amount is lower than the daily wage rate of some states, as notified by the Ministry of Rural Development under sub-section (1) of Section 6 of the Mahatma Gandhi National Rural Employment Guarantee Act, 2005. Despite farm loan waivers, farmers remain vulnerable to indebtedness again, given the poor returns from farming. Therefore, the policy of farm loan waivers is a temporary solution that fails to address the complex factors that put farmers at risk in the first place. 

Additionally, even this temporary fix benefits only a few farmers. The loans waived off under debt waiver schemes are usually taken from institutional sources of credit. Access to institutional sources is still a significant challenge among small and marginal farmers. Currently, small and marginal farmers account for around 86% of all farmers in India. As per the 2019 report by the Reserve Bank of India’s Internal Working Group to Review Agricultural Credit, only 41% of small and marginal farmers were covered by private and public sector banks. Therefore, most of the small and marginal farmers, who are the intended beneficiaries of farm loan waiver schemes, do not avail the benefits of such debt relief programmes. 

Concerns have also been raised regarding the impact of farm loan waivers on the credit flow to the agriculture sector. The credit flow is affected due to the problem of moral hazard among the beneficiary and non-beneficiary farmers. A study found that the intention to repay loans among the non-beneficiary farmers reduced significantly post the announcement of a farm loan waiver scheme. Additionally, the willingness to repay future loans reduced among the beneficiary farmers post the announcement and implementation of a debt relief scheme. Another study found that the cultivators who had already repaid their loans before the announcement of a farm loan waiver scheme felt cheated. Therefore, they were reluctant to repay their fresh loans. Due to these reasons, farmers are generally seen as high-risk borrowers. Since banks prefer lending to lower-risk borrowers, the credit allocation to farmers is negatively impacted.

Finally, policies like farm loan waiver schemes also squeeze the fiscal space available to the state and central governments. There has been a huge increase in farm loan waivers in recent times. Ten states announced farm loan waivers amounting to ₹ 2.4 trillion between 2014-15 and 2018-19. When states spend such huge amounts on farm loan waivers, it limits their ability to invest in agriculture and implement programmes that have the potential to improve the productivity of the sector. Therefore, while loan waivers provide temporary relief to the farmers, they also hamper the government’s ability to implement long-term solutions to the agrarian crisis facing the economy.

Conclusion: Moving Beyond Farm Loan Waivers

Indian agriculture is plagued by issues such as high price volatility, lack of access to inputs, poor price realisation, rising costs, inaccessibility to formal credit, poor bargaining power, etc. These structural challenges push farmers into a debt trap. As a way out, political parties have relied on promising debt waivers if elected to power. While such promises provide temporary relief to a few farmers, the larger structural challenges in the agriculture sector remain unaddressed. 

The frequency of such waivers has increased in an unprecedented manner in recent times. A farm loan waiver might be warranted in extreme situations like a natural calamity. In tandem, policymakers need to realise that indebtedness among farmers is a symptom of a much larger problem. 

In the 1960s, as a part of the green revolution, the government’s investment in research and infrastructure ultimately led to an increase in foodgrain production. Such a focus on the agriculture sector helped India shift from being a food-deficit country to a food-surplus country. Despite the massive success of the policies implemented during the green revolution, the agriculture sector has not seen a similar scale of policy-focus. To address the structural challenges that the sector is facing today, innovative solutions which focus on making agriculture remunerative as well as environmentally sustainable are needed. 


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