What is better: farm loan waivers or cash transfers?

Farm loan waivers as a production subsidy can be traced at the end user level for its effectiveness, which is not possible if it is a simple cash transfer.

Farm loan waiver is criticised by many as something that destroys credit culture among farmers while increasing the fiscal burden. However, some politicians still view it as the easiest way to address the farm distress.

Of late, there seems to be a change in the narrative against these waivers while favouring direct cash transfers as a better alternative. This article looks at these two alternatives weighing their capacity in addressing core issues related to the delivery of farm subsidies.

A green box payment: Ever since the agreement on agriculture was signed at the World Trade Organisation, there is an increased pressure on India to shift away from price support to agriculture — as it is considered trade-distorting — to green box subsidy payments.

A farm loan waiver is a classic example of green box subsidy payment that comes with an added advantage of the ability to precisely identify the distressed farmers from the whole segment of farmers who may need subsidies.

The essential characteristics for any subsidy payment to qualify as a green box payment, like not to be a trade-distorting, to be government-funded, not to charge higher prices to consumers, not to be targeted at any particular product and not relate to current production or prices, are all possessed by farm loan waivers.

The direct cash transfer payments – either based on land holding size or otherwise – also qualify as a green box payment but come with associated pitfalls and without any ability to distinguish between distressed and well off farmers.

The recently-introduced Prime Minister’s Kisan scheme is one such direct payment that is based on the now outlawed subsidy payment programme implemented by the USA. It is aimed at distributing cash through direct transfers to all farmers with some limit on land holding size.

The scheme document outlines two conflicting objectives, one to augment the “income” of farmers — that is earned after harvesting — and two to supplement the “expenditure on inputs” — investment for farming — that is incurred before sowing of crops. This implies we have no idea on what exactly we want farmers to do with the money and there is every possibility of untraceable leakages.

The Rythu Bandhu scheme of the Telangana government at least has some clarity on this as they call it as an “investment” subsidy and the delivery is timed just ahead of sowing. Then there is a third objective that aims to protect farmers from falling into the clutches of moneylenders for meeting expenses on farming activities.

It is interesting to see whether this particular objective can ever be achieved as many of the farmers who take loans from private money lenders are landless and are excluded from this particular scheme.

Production vs consumption subsidies: Prior to formulating any subsidy schemes for farmers, there is a need to identify farmers as “producers” rather than as mere “consumers”. There should also be a distinction between the way production subsidies and consumption subsidies are delivered to the respective beneficiaries.

Consumption subsidies given to consumers to maintain a certain level of consumption of certain commodities, like price subsidies or to maintain overall demand in the economy, like income transfers, may or may not need a trace on how it is spent by the end user.

But a production subsidy needs to be traced at the end user level as it is aimed at maintenance of a certain level of production of certain commodities. This, in turn, prevents import dependence for those commodities and creates employment opportunities in those sectors.

The effectiveness of subsidies in achieving these preset objectives can only be evaluated if we have enough information on the end use.

A cash transfer to a farmer - who actually needs a production subsidy — without any traceability, may end up as a consumption subsidy, spent on purchasing unknown goods and services rather than spending only on inputs for farm production. A farm loan waiver, on the other hand, given to a failed farmer, not only can be traced but also helps in maintaining employment level in the sector by allowing farmers to remain in the business of farming.

Need for a statutory body

Farming, like any other production activity, is a business operation, and purchasing a loan product for conducting such a business is not uncommon.

Similarly, going insolvent is also common if the business operation fails to generate enough income.

This risk of failure is relatively high in the fragmented Indian farming sector as products produced by these businesses are pure commodities which are sold at market-determined prices unlike other businesses that sell at predetermined MRPs or at cost plus pricing.

This commodity nature of farming products and the government’s failure to provide promised minimum guarantee prices, increases the risk of failure and thus insolvency levels in the sector and resolving the same needs to be a regular exercise.

If the Insolvency and Bankruptcy Code (IBC) can help in resolving insolvencies in the industry, it should be extended to farm loans as well, after making adequate changes to the law and procedures followed, considering the nature of the farming business.

Only an independent statutory body can ensure prevention of leakages to undeserved persons and misuse both at bank and branch level.

It is the genuine defaulters who need a waiver and not those who are capable enough to repay.

Identification these defaulters should be conducted in a professional way leaving no scope for any kind of political interference.

(The writer is an agri business consultant)