Why do economists frown at farm loan waivers but keep quiet when massive corporate bad loans are written off?

If bad loans of indebted farmers had been waived perhaps they would have escaped committing  suicide. 

This picture is of a congregation of farm widows in Punjab

No sooner did the Maharashtra Chief Minister Uddhav Thackeray announce a farm loan waiver that is expected to cost anything between Rs 45,000 to Rs 51,000-crore, mainline economists have warned of the rising NPAs of the banks and the strain it causes to the already precarious fiscal position of the State governments.

But strangely, the same questions were not raised when almost a month back, in early December, the Minister of State for Finance Anurag Thakur had in a written reply in Parliament, stated that public and private sector banks have written-off Rs 80,893-crore during April-September 2019 period. According to news reports, when asked who the beneficiaries were, the minister replied: “As borrowers of loan write-offs continue to be liable for repayment and the process of recovery of dues from the borrowers in written-off loan amounts continues, write-off does not benefit the borrower.”

It is true that write-offs are not exactly waivers since it only means that the bad loans are shifted from the bank books to another ledger while the recovery process continues. But the write-offs certainly do benefit borrowers. Let’s be clear, it is not as if the entire bad debt is recovered by banks. The percentage of bad assets that the banks are finally able to recover is far too low. As per the RBI, the rate of recovery of bad loans had come down from 18.4 per cent in the financial year 2014, to a low of 12.4 per cent by March 2015. It further declined to 10.3 per cent in the financial year ending March 2016. To illustrate, out of an outstanding amount of Rs 221,400-crores of bad loans in 2016, only Rs 22,800-crore could be recovered. It will be interesting to know what happened to the remaining Rs 198,600-crore.

Although under the Insolvency & Bankruptcy Code (IBC) 2016, the recovery of bad loans has shown a marked improvement – from 49.6 per cent in 2017-18 it has trailed to 42.5 per cent in 2018-19 – a total of Rs 70,819-crore was recovered against a pending amount of R 1.66-lakh crore for 1,135 cases admitted before National Company Law Tribunal (NCLT) for insolvency resolutions in 2018-19. Add to this recoveries made through other routes like Lok Adalats, Debt Recovery Tribunals and SARFAESI Act, the scheduled commercial banks managed to recover only Rs 1.26 lakh crore from a total outstanding of Rs 8.15-lakh crore in 2018-19, which shows to be only 15.5 per cent. With the actual recovery being dismal, it is the banks which end up taking the hit. No wonder, the government had two years back announced a bank recapitalisation programme of Rs 2.11- lakh crore to bailout banks, followed by another Rs 70,000-crore in 2019.

Against these corporate write-offs, farm loan waivers in the past six years total to Rs 2.85 lakh crores (adding the proposed Rs 45,000-crores waiver in Maharashtra). Compare this with just 354 liquidation cases pending for 2020. According to a news report, the claims for liquidation in respect of these companies stand at a staggering Rs 3.55-lakh crores. As per the data available with Insolvency and Bankruptcy Board of India only 4 per cent of this will be realised, which means only Rs 15,165-crore. Banks are staring at zero realisations in many of the insolvency cases pending.

While the bank write-offs affect a limited number of borrowers, a significant number of them being wilful defaulters, Maharashtra’s farm loan waivers are expected to benefit 44-lakh small and marginal farmers. Drawing from the experience of Punjab, Maharashtra has decided to waive bad farm loans up to an outstanding of Rs 2-lakh for each farmer. The problem with the Punjab farm loan waiver scheme is that only outstanding loans up to an exact Rs 2-lakh are waived, which means if the outstanding bank amount exceeds Rs 2-lakh even by Rs 500 the farmer will not get the waiver. This has led to a lot of resentment among Punjab farmers. I only hope Maharashtra is not following the Punjab example in letter and spirit.  

Coming at a time when a continuing drought was followed by heavy rains, a phenomenon termed as ‘wet drought’, standing crops in 70 lakh hectares are feared destroyed in Maharashtra. According to revenue estimates, almost 85 per cent of the kharif crops in Marathwada region were destroyed. While more than 1-crore farmers were affected from the incessant post-monsoon rains, the State had assessed the crop loss to be more than Rs 5,000-crore. Officials say Rs 6,552-crore has so far been distributed as crop loss compensation.

With farm distress continuing over decades, Maharashtra has turned into a hotbed of farmer suicides. In November 2019, a record 300 farmers had reportedly committed suicide. In the 6-year period between 2013 and 2018, an RTI response showed 15,356 farmers had committed suicide. It is generally agreed that the distress is primarily because farmers have continuously been denied their rightful income. An OECD-ICRIER study shows, between 2000 and 2016, Indian farmers lost Rs 45-lakh crore for not being paid the right price. In the past seven years, as per Niti Aayog calculations, growth in real farm incomes had remained at ‘near zero’. In such a depressing farm scenario, farm debt has continued to multiply. Farm loan waivers therefore provide an immediate relief. #  

Maharashtra farm loan waiver justified. Deccan Herald. Jan 10, 2020
https://www.deccanherald.com/opinion/in-perspective/maha-farm-loan-waiver-justified-793003.html?fbclid=IwAR0PWj9nAgIvBaYmOavApo5dki8rxd5drGspux37gTS7hVwarl1ZV9OyEjM

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With high productivity, assured irrigation, a higher MSP and loan waivers in progress, why are Punjab farmers dying?

At a farm widow congregation in Punjab 

A day after the massive farmer protest in New Delhi, hundreds of farmer widows had assembled at Mansa in Punjab. I sat there listening to the heart-rending testimonies of several farm widows, among the hundreds who had assembled at Mansa. In the land of Green Revolution, to see and meet hundreds of farm widows was not so easy. As they stood to narrate their painful stories, more often than not they just stood in front of the mike, said a few words and wept. The silence that followed said everything.

There is hardly a day when I don’t find news reports of farmers committing suicide. A study conducted jointly by the Punjab Agricultural University, Ludhiana; Punjabi University, Patiala; and the Guru Nanak Dev University in Amritsar had in a house-to-house survey put the alarming death toll figures at 16,600 in the 17 year period, between the year 2000 and 2017. In other words, roughly 1,000 farmers and farm workers have taken the extreme step of ending their life every year in the agriculture frontline State. As the serial death dance on the farm continues unabated, another study by the Punjabi University estimates that one in every three farmers in Punjab is living below the poverty line.

As the widows narrated their agony and enormous struggle, as to how they were coping with the huge void left behind by the only bread-earner in their family, I sat wondering why had Punjab, often called as the food bowl of the country, turned into a hotbed of farmer suicides. Why nearly 98 per cent of the rural household were in debt, and 94 per cent of these households had reported more monthly expenditure as compared to their gross incomes. In other words, the rural households in progressive Punjab were living in debt. To live in perpetual indebtedness, and that to year after year, generation after generation, is the worst humiliation that any human being can suffer. Former Prime Minister Charan Singh had rightly remarked that a farmer is born in debt and dies in debt. What he did not say was that living in indebtedness all through your life is akin to living in hell.  

 

Listening to the farm widows, I tried to put the puzzle in place. If providing an assured Minimum Support Price (MSP) for crops, writing-off of outstanding farm loans, and expanding the irrigation network is primarily the recipe for ensuring farm prosperity then Punjab already has these in place. With 98 per cent assured irrigation, meaning that every farm gets an assured irrigation supply, and with the highest productivity of cereal crops – wheat, rice and maize – in the world, why is it that hundreds of farmers are still forced to commit suicide every year? If productivity and irrigation were the answer to the prevailing agrarian crisis then there is no reason why Punjab farmers should be dying. This only shows that the reasons behind the terrible agrarian crisis that prevail lie much beyond crop productivity and irrigation.  

On top of it, Punjab has a very extensive and elaborate system of procurement of food crops. With a huge network of APMC mandis and purchase centres, Punjab has the best infrastructure for procurement of crops in the country. It also has a vast network of rural roads linking the mandiswith the villages. With mandis and rural link roads in place, whatever stocks are brought to these purchase centres and if it meets the quality specifications are purchase at the fixed support price. Over 98 per cent of the wheat and paddy that is brought to the mandis by farmers is purchased at the fixed price. Farmers are able to sell their produce at the officially declared Minimum Support price, which is much higher than the prevailing market prices. That’s the reason why truckloads of paddy are illegally transported all the way from Uttar Pradesh and Bihar to be sold in Punjab mandis.

In addition, Punjab has also announced a farm loan waiver for a maximum of Rs 2-lakh per small and marginal farmer. Although the electoral promise was to waive all kinds of outstanding loans drawn on cooperative, private and nationalised banks, the State has so far promised to waive roughly about Rs 9,000-crore of farm loans of small and marginal farmers. Of which, approximately Rs 1,000-crore worth of farm loans have been waived off so far. In Maharashtra, against the initial estimate of Rs 34-lakh worth of farm loans to be waived, an estimated Rs 14-lakh crore is now planned to be struck out. Similarly, in Uttar Pradesh, Karnataka, Tamil Nadu and Rajasthan where only a fraction of the promised loan amount is being actually waived. The problem is that despite the election promises the State governments do not have the resources to provide for writing-off the entire outstanding farm loans.

Each of the farm widows reeled out an amount of farm loan, varying between Rs 2-lakh to Rs 12-lakh that their deceased husbands left behind. And that made me wonder how come the economic situation had reached such a despicable levels despite Punjab offering the best of rural infrastructure, irrigation and technological advance.

Punjab, therefore offers an excellent case study to understand, re-strategise and formulate a set of agricultural reforms that are more meaningful and effective. A set of reforms that actually go beyond the rhetoric and lay out a roadmap for the future where the society doesn’t have to treat the small and marginal farmers as a national burden. Instead of treating them as abandoned people, the challenge should be to ensure how the rural masses base could benefit from as well as become part of economic growth. That’s why I have always been saying that the time has come to move away from price policy to income policy. The need is to provide farmers with an assured monthly income, which is not only WTO compatible but also provides economic security to farmers. The demand should be to convert the CACP into a Commission for Farmers Income and Welfare with the mandate to assure a monthly living income of at least Rs 18,000 per farm family. That will be the beginning of Sabka Saath, Sabka Vilas. It’s time to think again. #

READ MORE - With high productivity, assured irrigation, a higher MSP and loan waivers in progress, why are Punjab farmers dying?