Food processing and exports can help release some pressure, but these may take time to grow
Neelkanth Mishra | Last Updated at July 3, 2017 23:14 IST
(This was published in the Business Standard: link)
The clamour for farm loan waivers does not seem to be abating, even if it has been pushed to the back pages for now by news around the goods and services tax transition. We continue to believe this is a structural issue, with rising agricultural productivity (helped by roads, phones and electricity) pushing up supply, whereas food demand growth has weakened due to falling per capita calorie demand and slowing population growth. Food processing and exports can help release some pressure, but these may take time to grow.
While political forces may have precipitated the issue around loan waivers, the stress was very clearly visible: Agricultural income growth slowed sharply in the last three years after nearly a decade of double-digit increases. Even the sense of optimism that a good monsoon used to bring has been tempered, as last year’s weak pricing offset stronger volumes. This year, with the monsoon running six per cent above normal and deficient only in the eastern part of the country, area sown under kharif crops so far is up 19 per cent over the same time last year. These are early days as only a fifth of the area has been sown in June, and year-on-year comparisons thus far may also be helped by a lower base (last year the monsoon had started late). However, it does appear that weak pricing may not affect acreage sown.
A normal monsoon this year may again worsen the oversupply, underscoring the structural issues facing agriculture. States with elections due in the next year or so may be the most vulnerable to such demands. It is pointless and a trifle late to pontificate on the advisability of loan waivers now: Analysing their implications may be more useful.
The trouble with farm loan waivers is that they are relatively easy to announce, but rather more difficult to implement. The challenge is not primarily fiscal (i.e. finding the funds): While the basic contours of these waivers have been publicised in some states these need to be translated to individual details before banks can waive loans. This means answering several non-trivial questions: Should there be crop-specific waivers, should those with irrigated farms get less, should absentee landlords get nothing, and by corollary should tenant farmers get more? What should be the quantum of waiver, and how should this be phased out? We understand that loans data are not linked to specific crops, tenancy records are patchy, and irrigation data are not updated. It is likely to take state governments many months to identify beneficiaries and execute on the plan, by which time the numbers may be very different. In the 2008 loan waiver for example, the announcement was made in February, the Cabinet approved it in May, the first disbursement happened in December that year, and the exercise was completed only two-and-a- half years later. Also, the final amount waived was 27 per cent, or Rs 19,000 crore lower than first announced.
This delay makes matters worse during the period of implementation. As farmers are not clear how much of whose loans are going to be written down, their repayment behaviour gets affected, and banks then curtail lending to these regions. Indeed, in the months of April and May this year, year-on-year growth in agricultural loans for Scheduled Commercial Banks (SCBs) fell sharply to just 1 per cent and 7 per cent, respectively, the lowest levels in a decade. Telangana and Andhra Pradesh also saw a sharp dip in loan growth when they started their loan waivers three years back. Even priority sector lending (PSL) targets may not help as these are set on the previous year’s closing loan book, and system loan growth last year was merely 5 per cent. A slower influx of fresh funds into these economies then slows down overall activity as well, contrary to expectations of a consumption boost.
We estimate that the total agricultural loans outstanding are about Rs 15 lakh crore (including loans from SCBs, rural cooperative banks and Regional Rural Banks), of which a bit less than Rs 10 lakh crore is in the nine states where waivers have been announced, or are part of the political discourse already. If every affected state were to waive loans in the same ratio as UP and Maharashtra did (about 30-31 per cent of SCB loans outstanding), about Rs 2.1 lakh crore would be waived. However, the waivers announced in Punjab and Karnataka are much smaller: 16 per cent and 9 per cent, respectively. This suggests that the aggregate waiver would be in the range of Rs 1.2 lakh crore to 1.5 lakh crore.
The complexity of implementation as well as the lack of fiscal space may force state governments to spread these waivers out over several years. Telangana, Andhra Pradesh and Tamil Nadu have already been doing so, and Punjab has made a similar announcement. Moreover, for many of the states considered in the analysis waivers may be announced much later. If these waivers were to be spread over four to five years, the annual impact would be Rs 30,000-35,000 crore: Not a trivial sum, but at about 0.2 per cent of GDP, a manageable number for the bond markets.