Cabinet Wants Farm Loan Waiver



  • A Cabinet subcommittee has proposed a waiver of loans without clear parameters on who qualifies or finding the root cause

  • Rural indebtedness is a major issue in India causing large-scale disaffection and leading to farmer suicides

  • As in Tamil Nadu, politicians use this as an excuse to hand out lots of money but without fixing the real issue implementation.

A Cabinet Subcommittee has recommended that the Government waive loans of farmers and individuals who had borrowed money from the Punjab Backward Classes Finance Corporation and the Punjab Scheduled Castes Finance Corporation. The panel headed by the Rural Development Minister Lal Singh which includes the Cabinet Secretary and other senior bureaucrats identified farm laborers and poor people from backward classes as those who would be eligible for this scheme. The ostensible reasoning of the panel is that these people are unable to pay back loans although the Punjab Pradesh Congress Committee has been lobbying the Government for such largesse.

While the panel is still working on the actual cost of this proposal, loans on paper amount to Rs. 2085 crores (USD 453 million) apart from an accrued interest amount of Rs. 1268 (USD 275 million). Besides the loans from banks and Government institutions, rural debt from private money lenders is valued at Rs. 12,000 crores (USD 2.608 billion). Apparently, the Government is also a taking moneylenders and commission agents “into confidence” before taking a final decision.

Part of the process of taking the loan sharks “into confidence” includes understanding interest rates being charged, transparency in lending, methods of repayment, etc. The Punjab Finance Corporation had earlier bought off loans from these loan sharks but those loans are being forgiven. Singh says that the Government will formulate a new law but in consultation with the moneylenders.

Rural indebtedness is a major source of financing, poverty, suicide, disenfranchisement, and enslavement in India. Farmers and rural itinerant labor often borrow money for non-productive or non-business purposes such as death, marriage, celebration, etc. Since banks and Government institutions do not lend money for such purposes, they borrow money from loan sharks at exorbitant rates that is not sustainable. Often they mortgage whatever jewelry and property that they may own. Understanding the incapacity of the farmers, loans sharks knowingly take the risk to advance moneys only to covet their property later on.

In extreme cases, loan sharks illegally enslave entire generations and gain access to the family for free labor and sex. Such violent abuse creates disenfranchisement of populations and spark retaliatory attacks on these abusers who are often politically connected or politicians themselves. If the disaffected population is unable to extract revenge, they join underground violent groups such as Naxals and perpetrate the same violence as they experienced on other poor farmers. The abusers themselves do not file or pay taxes for the large interests that they earn.

Indiscriminate largesse to farmers or the poor will not solve anything. In fact, it will only make matters worse. It will encourage others to take loans with impunity and expect the Government to bail them out every time. A better plan is to identify individuals who had lost money from natural disasters such as drought, floods, etc. and find ways by which they can pay back the money without interest. Furthermore, the Government should regulate rural money lending by fixing interest rates, requiring registration of property, banning arbitrary attachment of property to loans, and controlling the liquidation of assets at fair market value to pay off debts. Most importantly, the Government should create awareness of the rural population on dangers of indebtedness and the actual cost of such loans.

In recent elections in Tamil Nadu, the Dravida Munnetra Kazhagam (DMK) promised such largesse to gain votes. While it did win the elections to form the Government, the promised largesse did not get it large number of votes and instead won because of a vote split in the opposition. The Federal Government had to finance such a bailout  making the deficit situation worse  that what it already is.

The current proposal does not seem to have any process to identify deserving candidates or measures to control such developments in the future but looks like political largesse aimed to attract votes in the next election in Punjab.

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