In April, Uttar Pradesh government waived farm loans worth over Rs. 36,000 crore.
State governments in Tamil Nadu, Maharashtra, and Punjab have also extended similar waivers.
This has now led to fears that farmers in other States too could begin asking for waivers.
Why are governments writing off loans?
Farm loan waivers mostly been used as a tool by governments to temporarily address the problem of farmer distress.
Due to an overall good monsoon last year there was a bumper production of farm goods.
This lead to a rapid fall in the prices of the farm goods.
This has forced the farmers to default on the loans they borrowed from banks.
With the prevailing low prices, it would be costlier for the State government to procure the produce of farmers at remunerative prices.
So they have resorted to loan waivers that cost less money.
What is the impact of loan waivers?
Banks will have to be compensated by the governments for the losses they incur. So this imposes a significant cost on the budgets of State governments.
It could also encourage wilful default by farmers who can actually afford to pay off their loans, thereby further increasing the cost.
This could also send a wrong message. e.g When farmers know that the government will waive off their loans when things go wrong, they are more likely to make poor investments or take higher risks.
What is the real problem?
Loan waivers are only the symptom of an underlying problem.
The real problem may be populist lending that has pushed Indian farmers into a debt trap.
Farmers are a powerful vote bank for many major political parties.
So many State governments push loans to farmers without proper risk analysis.
Indian agriculture also faces crisis due to the risks involved in agriculture, and the lack of sufficient returns.
This cannot be solved through temporary populist measures.
They require structural reforms to improve farmer incomes.
