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LATEST NEWS UPDATES | The hazards of farm loan waivers -Tanika Chakraborty and Aarti Gupta

The hazards of farm loan waivers -Tanika Chakraborty and Aarti Gupta

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published Published on May 25, 2017   modified Modified on May 25, 2017
-Livemint.com

Research provides evidence that a blanket farm loan waiver scheme is detrimental to the development of credit markets

The Bharatiya Janata Party (BJP) won the 2017 state elections in Uttar Pradesh with a thumping majority and once again, the state government has a debt-waiver package ready to be implemented. The BJP’s electoral manifesto had committed to write off loans of small and marginal farmers, which would approximately cost the government Rs37,000 crore, according to initial reports. Intervention in the credit market through household debt relief has been a fiscal policy adopted by many governments both at the Central and state level for many years.

The support for debt-waiver programmes comes from the theoretical argument that a high level of outstanding debt reduces the incentive for the debtor to exert effort to repay. In such a situation, a policy of debt forgiveness could induce the optimal level of effort from the debtor and maximize repayment. However, repeated debt-waiver programmes might alter the expectations of debtors about enforcement of future credit contracts. This, in turn, could adversely affect the level of effort. For instance, consider the case of debt-waiver programmes in the context of agricultural credit markets wherein farmers obtain loans against collateral, land in most cases, which are freed once the loans are repaid. If farmers expect governments to intervene and free their collateral from banks, in case of default, they are likely to reduce productive investments and spend more on consumption.

Past empirical research analysing the 2008 nationwide Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS) found that it led to a delay in loan repayment, increase in defaults, and no significant productivity gains. In spite of the evidence against the effectiveness of the ADWDRS programme, many states continue to announce their own state-level debt-waiver schemes. It is possible that state-level debt-waiver schemes could address state-specific indebtedness problems that a generic national-level programme like ADWDRS could miss.

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Livemint.com, 24 May, 2017, http://www.livemint.com/Opinion/8tQu6sZVRwnRhMUNJBhiIN/The-hazards-of-farm-loan-waivers.html


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