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Tamil Nadu chief minister Edappadi K Palaniswami last week informed the state assembly that his government will waive Rs 12,110 crore of crop loan issued to 1.64 million farmers by cooperative banks. The loan waiver comes ahead of an assembly election that will take place in summer. Another important context is that Palaniswami is a strong supporter of the central farm laws to reform agriculture and also the leader of a political coalition in which BJP is a junior partner. The state BJP leaders are supportive of their ally’s loan waiver scheme.
These developments show how incoherently political consensus is built to bring about agricultural reforms. A compelling case for central farm laws comes from the distortions that have arisen on account of the existing agricultural subsidy regime. The collateral damage of this regime includes sinking water tables and worsening air quality in north India. Agricultural reform does not mean ending support to farmers. It requires a change in the nature of support from indirect subsidies to more direct ones like income support some states and the Centre provide through transfers into bank accounts.
One of the harmful distortions comes through government subsidies in the form of a loan waiver, such as the one promised by TN. Between April 2014 and September 2019, RBI said 10 states waived farm loans aggregating Rs 2.4 lakh crore. It’s huge, bigger than the two national loan waivers of 1990 and 2008 put together, even after accounting for inflation. Loans that are waived are paid off by the states but over a period of time. This damages the banking system. It spoils the repayment culture and also affects future credit outflow as banks begin to look for safer options.
Political parties can’t have it one way at the Centre and another way in the states. Instead of undermining the case for reforms in this fashion, indirect subsidies should be phased out, which is easy now because the mechanism for direct bank transfers is in place. TN’s loan waiver works out to about Rs 73,706 per farmer, more than 12 times the Centre’s annual income support of Rs 6,000. If this sum had come through a direct transfer, it would have built a case for backing market-oriented reforms, which both AIADMK and BJP support. Instead, we have one more instance of an indirect subsidy which will trigger collateral damage.
This piece appeared as an editorial opinion in the print edition of The Times of India.