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Thursday, 16 March 2017 04:06
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Farm loan waivers can end up hurting farmers

 

Though the country’s stock markets, including bank stocks, have rallied smartly after the Uttar Pradesh elections in the hope of faster reforms following a fresh mandate for prime minister Narendra Modi, bank stocks could well surrender a large part of the gains if the government goes ahead with the loan waivers the BJP spoke of during the election process. While it is not exactly clear whether BJP leaders are looking at waiving all farm loans or only those given by state cooperatives, the impact could be quite serious  – at a pre-election rally, the prime minister had said waiving of farm loans would be the first decision of the BJP cabinet, were it to come to power. According to a report by Kotak Institutional Equities, the total outstanding loans to the agriculture sector in UP is around Rs 86,000 crore – roughly a fourth of all loans to the sector are in the agriculture sector. Though the break-up of loans given to small and marginal farmers are not clear – only this is to be waived – it could end up being a significant part of the state’s GSDP and so, it is not clear whether the government can afford it. At the national level, any move to waive farm loans could trigger copycat demands, as a result of which there will most likely be a hike in farm-sector NPAs – though the BJP did not make waiver of farm loans a part of its manifesto in Maharashtra, the Shiv Sena and the Nationalist Congress Party (NCP) have already stepped up a demand for loan waivers on grounds this has been promised in UP.

 

The Kotak report has some interesting numbers on the likely impact of any farm-loan waiver. In the case of Andhra Pradesh, Kotak points to loans growth slowing and the proportion of NPAs rising after the loan waiver in the state. In Telengana also, the proportion of NPAs in agriculture lending is high in the 7-8% range. In such as a situation, if banks are either to go slow on lending a year or so prior to elections in a state or to increase lending rates to take into account the possibility of higher delinquency, that only ends up hurting farmers more since they will then be forced to borrow more at higher interest rates in the informal market. Though some compare farm-loan waivers to restructuring of corporate loans, this is misplaced since in the case of the latter, promoters end up losing a part of their equity stake; how large depends on the amount of the restructuring.

 

The prime minister will do well to keep in mind that farmers are in poor shape due to agriculture policies that prevent them genuine marketing freedom and the lack of a pan-India market due to both marketing restrictions and the government’s refusal to allow a vibrant futures market to develop – the global market is, in any case, opened or closed so frequently due to government policy, it prevents India from becoming a serious agriculture exporter. Just tackling one aspect of the farmers’ problems will only end up making it worse, apart from dealing a big blow to bank balance sheets.

 

 

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