The Reserve Bank of India organised a seminar on ‘Agricultural Debt Waiver – Efficacy and Limitations’. Opening remarks were made by the Governor, Dr. Urjit R. Patel. This was followed by presentations by experts in the area. Four sessions in the seminar comprised presentations of research papers and the remaining two sessions were panel discussions on: (i) Agricultural Debt Waivers: Impact on the Fisc; and (ii) Agricultural Debt Waivers: Impact on the Banking Sector.

In the first session, Dr. Martin Kanz (Paper/Presentation) of the World Bank argued that while there is only limited evidence of debt relief improving efficiency in credit allocation, it creates a moral hazard problem and a negative impact on the credit discipline of borrowers. As importantly, there is no evidence of improvement in agricultural productivity, rural wages or household consumption.

In the second session, Dr. Krishnamurthy Subramanian and Dr. Prasanna Tantri (Paper/Presentation) of the Indian School of Business (ISB), Hyderabad found that while debt relief improves the loan repayment behaviour of distressed borrowers, it has little effect on the loan repayment behaviour of non-distressed borrowers.

The panel discussion on ‘Agricultural Debt Waivers: Impact on the Fisc’, moderated by Dr. Ravindra H. Dholakia, Professor, IIM Ahmedabad included Dr. Vijay Paul Sharma, Chairperson, Commission for Agricultural Costs and Prices; Shri H. R. Dave, Deputy Managing Director, NABARD; Dr. Samiran Chakraborty, Managing Director, Chief Economist, Citigroup, India; and Dr. Pinaki Chakraborty, Professor and Acting Director, National Institute of Public Finance and Policy. Some panellists argued that the recent agricultural debt waivers could have a considerable adverse impact on states’ fiscal position and could further aggravate overall fiscal risks.

In the fourth session, Dr. R. Ramakumar (Paper/Presentation), Dean, School of Development Studies, Tata Institute of Social Sciences, Mumbai argued that the states with better land records and land reforms were able to provide full loan waiver to almost all the beneficiaries of the 2008 scheme, while others could provide relief to a relatively low proportion of the beneficiaries.

In the fifth session, three presentations were made by staff of the Reserve Bank of India and one by Centre for Advance Financial Research and Learning (CAFRAL). Based on a scenario analysis, Shri R. Rajendra pointed out that financing of increased expenditure on account of loan waiver is likely to be a challenge for state governments. On the basis of survey of two districts of Tamil Nadu under the 2016 debt waiver scheme, Ms. Deepa S. Raj and Shri Edwin Prabhu found that, near the cut-off acreage, the probability of non-beneficiary farmers obtaining credit is higher than beneficiary farmers in the post-waiver period. Dr. Indrani Manna showed that loan waivers are detrimental for the government balance sheet; fiscal volatility shocks, though small in magnitude, have a prolonged impact. Dr. Nirupama Kulkarni pointed out that state governments’ farm loan waivers have the potential to crowd out corporate borrowings if financed through state debt issuances.

The panel discussion on ‘Agricultural Debt Waivers: Impact on the Banking Sector’ included panellists: Dr. Nachiket Mor, Director, India Office, Bill and Melinda Gates Foundation; Shri P.S. Jayakumar, Managing Director and Chief Executive Officer, Bank of Baroda; Dr. Sajjid Z. Chinoy, India Economist, J.P. Morgan; and Dr. Sudha Narayanan, Associate Professor, Indira Gandhi Institute of Development Research. Dr. M.S. Sriram, Professor, Indian Institute of Management (IIM), Bangalore was the moderator for the panel discussion. They argued that while such waivers may benefit banks in the short-run as the government takes over debt, they may be detrimental in the long-run as waivers hamper credit discipline, leading to reduced credit flows. They also highlighted the fundamental drivers of broader agrarian distress in the economy.

In his concluding remarks, Deputy Governor Dr. Viral V. Acharya stated that loan waivers may, at best, be a short-term remedy for farmers’ distress, and cannot be regarded as a long-term solution for the problems in Indian agriculture. A sustainable and long-term resolution of our farmer community requires concerted and urgent reforms in the areas of agricultural marketing, pricing, credit and extension systems, and an open trading regime.

Jose J. Kattoor
Chief General Manager

Press Release: 2017-2018/599