Crop Loan Waiver, Fiscal Space and the Farmer Who Is Left Out
A state announces a crop loan waiver of Rs 18,000 crore, capped at Rs 1.5 lakh per farmer, to be funded by cutting capital outlay on minor irrigation by 30% and by deferring a Rs 2,000 crore drinking-water project by two years. Of 42 lakh borrower accounts, 9 lakh are tenant farmers with no pattadar passbook and will not be covered; 4 lakh hold loans above Rs 1.5 lakh and get partial relief; 6 lakh are repeat defaulters excluded by the scheme rules. The state's own fiscal deficit is 3.4% of GSDP against a 3% ceiling. Farmer groups welcome the waiver; economists warn of a moral hazard and a credit freeze next season.
1. Evaluate the waiver as public policy using efficiency, equity and fiscal criteria.
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A strong answer separates the political popularity from the policy merit on three axes.
- Equity: the design is regressive at the margin. The 9 lakh tenant farmers - often the poorest - get nothing because they lack a passbook; the 4 lakh large borrowers get partial relief; the 6 lakh defaulters are excluded by rule. So the scheme helps the middle of the distribution most, while the poorest are invisible to it. That is the central equity failure.
- Efficiency: a blanket waiver creates moral hazard - the 6 lakh excluded defaulters learn that default is punished, but the covered learn that repayment is optional. Expect a credit freeze: banks facing Rs 18,000 crore of write-offs will ration next season's crop loans or price them higher.
- Fiscal: financing the waiver by cutting minor irrigation capital outlay and deferring drinking water is borrowing from the future to pay for the present - it reduces the very productivity that would let farmers repay. A 3.4% deficit against a 3% ceiling means the state is also straining its fiscal rules.
Verdict: the objective (relief to distressed farmers) is legitimate; the instrument is badly targeted and the financing is self-defeating.
2. What alternative design would you recommend to the state, and how would you handle the tenant farmers?
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The alternative should keep the relief but change the targeting and the financing.
- Target distress, not debt. Use a distress index - crop loss, rainfall deficit, landholding size - rather than the loan balance. Relief then goes to those who actually failed, not to those who borrowed most.
- Bring tenant farmers in by evidence, not title. Accept lease agreements, village-level certification by the gram sabha, and tenant registration drives. A one-time tenant registration before the scheme cut-off would have covered most of the 9 lakh.
- Pay on time and in instalments tied to repayment behaviour - e.g., relief credited after the next season's prompt repayment - to blunt moral hazard while still giving relief.
- Protect the capital budget. Fund the waiver from revenue buoyancy, disinvestment or a phased two-year outlay, not from minor irrigation and drinking water, which are the state's growth and health base.
- Fix the credit channel by an explicit state guarantee to banks so they keep lending next season.
The tested judgement is that a good intention does not rescue a bad instrument, and that the poorest are usually excluded not by malice but by the paperwork the scheme assumes.