Farm Loan Waivers and Production Risk
Source: Flickr, Sandee Pachten

Recent protests and farmer strikes in several Indian states over the issue of farm loan waivers are highlighting the economic struggle that many Indian farmers, particularly smallholders, continue to face.

The protests center on the question of whether government loans made to farmers for seeds and other short-term agricultural inputs should be waived in the event of crop loss or falling agricultural prices. Several states, including Maharashtra, Madhya Pradesh, Punjab, and Karnataka, have discussed such loan waivers, but have also proposed setting limits on how much of the loan can be waived. For example, the Economic Times reports that in Maharashtra, state officials recently proposed a waiver limit of Rs 1 lakh for eligible farmers; eligibility will be determined by a farmers’ landholding, with larger plots of land potentially being excluded. Punjab has also set loan waivers at RS 2 lakh for small and marginalized famers, while Karnataka has agreed to waive loans up to Rs 50,000.  The states’ rationale is that offering unlimited loan waivers to farms of all sizes will become too expensive; rather, the focus should be on small and marginalized farmers who truly need the help.

Farmers and farmers’ groups objected to the idea of waiver limits and landholding limits, stating that such limits were not part of their original negotiations with the government and that they could end up further hurting poor farmers who are struggling to repay their loans. While state governments in Maharashtra and Madhya Pradesh have backed down from their proposed loan waiver limits following the protests, farmers in in these states and in other states throughout the country continue to feel the pressure of low agricultural prices.

However, the debate about loan waivers and waiver limits is just the latest chapter in the larger discussion of structural problems within India’s agricultural sector. While India’s economy continues to grow at a rapid pace, farmers often find themselves left behind. According to a 2016 government economic survey, the average income for farmers in 17 states was Rs 20,000 (around $300) per year. These low wages impact a substantial portion of India’s population, as agriculture employs more than half of the country’s 1.3 billion people (Voice of America).  

Average land holdings in India also remain small, with 117 million farms categorized as “small and marginalized” (operating on 2 hectares of land or less) in 2010-2011, according to another article in the Economic Times. Small farmers often have less access to agricultural inputs, markets, and credit, making it difficult for them to farm profitably. Small farmers can also be limited by land lease and land tenancy laws, which prevent smallholders from leasing out their plots in many states.

Farmers also often face a double-edged sword when it comes to production and sales, said Ashok Gulati of the Indian Council for Research on International Economic Relations in a recent interview in Voice of America.

“There is a strong pro-consumer bias in the system,” Gulati stated. “When there is a drought, as there was in 2014 and 2015, farmers suffer as production drops, and when there is a good harvest they suffer again as prices crash in the absence of commensurate storage and processing facilities or due to export restrictions.”

While loan waivers may help farmers cope with production or price shocks in the short term, addressing the structural issues plaguing India’s agricultural sector will require coordinated, long-term efforts. PK Joshi, Director of IFPRI’s South Asia program, recommends that “as a long-term solution, agriculture must be treated as an agri-business profession. Farmers need to come together through farmer-producer companies or cooperatives to reduce transactions costs and increase bargaining power to raise their incomes.” 

By: Sara Gustafson, IFPRI

Photo credit:Flickr, Sandee Pachten