Chairing his first cabinet meeting, the CM of UP has approved a write-off on outstanding farmer loans of up to Rs. 1 lakh taken before March 31, 2016.
What are the ill-effects?
The UP cabinet also decided to waive loans worth Rs. 6,000 crore extended to small and marginal farmers that had turned into NPAs.
Together, this package, aimed at fulfilling the election promise, will cost the exchequer about Rs. 36,000 crore.
A little earlier, the Madras High Court ordered the TN govt to extend a similar farm loan waiver scheme for small farmers and marginal farmers to all farmers.
Officials have even been forbidden from trying to recover loans where repayments have slipped.
The State, which had already doled out Rs. 5,780 crore on this front, would need nearly Rs. 2,000 crore more to comply with the court’s order.
This is a worrying trend for a country that wants to double agricultural incomes by 2022.
Not only could it trigger a countrywide clamour for similar debt relief packages, political parties would also be more inclined to make such promises ahead of polls.
Also, the Madras High Court has clearly reached into the the domain of the executive.
Forgiving loan burdens is like govts have had little patience to make agriculture a sustainable economic activity with efficient linkages to formal markets.
Writing off loans as a blanket policy, without scrutiny and restructuring attempts creates a moral hazard for borrowers, who will have no incentive to stick to credit discipline.
Frequent write-offs will prod banks to invest in alternatives such as the Rural Infrastructure Development Fund instead of reaching out to individual farmers to meet their agricultural lending targets.
