Interest-free loans and income support— the upcoming Budget may be a song for India’s farmers

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  • The government is set to offer farmers a series of cheap funding options as well as income support in its interim budget.
  • The plan involves interest-free and collateral-free loans of up to ₹300,000 and a direct cash transfers to smallholder farmers.
  • The BJP’s potential decision to forgo further loan waivers comes as it stares at a huge fiscal deficit.
  • If the government breaches its spending targets, it could scare foreign investors away, hurt debt and equity markets and lead to depreciation of the rupee.
The Modi administration is likely to woo Indian farmers with interest-free loans and cash handouts.

It is set to forgo plans for loan waivers and instead offer farmers a series of funding options and income support as part of its upcoming interim Budget set to be unveiled on February 1, according to media reports.

The plan, which is said to be the joint effort of the Ministry of Agriculture and government think thank Niti Aayog, involves interest-free and collateral-free loans of up to ₹300,000. It also includes income support in the form of a cash transfer in bi-annual instalments to smallholder farmers.

The move comes as a surprise.

In the weeks and months since the Congress party’s victory over Modi’s Bharatiya Janata Party in three crucial state elections, it had been widely speculated that the latter would offer a series of loan waivers to farmers in its interim budget in order to curry favour before general elections. After all, the Congress’s victory was attributed to its promise of debt relief to farmers in these states.

The BJP’s potential decision to forgo further loan waivers makes fiscal sense. It is staring at a huge fiscal deficit, and if it breaches its spending targets, it could scare foreign investors away, hurt debt and equity markets and lead to depreciation of the rupee.

While a loan waiver can secure votes from farmers, it’s the banks, taxpayers and future governments that are on the hook for the unrecoverable debts. The waiver will eventually lead to a buildup in banks’ bad loans and shortage in funds for the purpose of extending further loans.

The move echoes the views of Shaktikanta Das, the new governor of the Reserve Bank of India, who said last week that loan waivers would have a negative effect on the country’s credit culture. If loan waivers are handed out so regularly, it is argued that it may disincentivise farmers from making payments on their loans.

More importantly, smallholder farmers aren’t covered by loan waiver schemes since they can’t offer collateral to formal lending institutions like their largeholder counterparts. That means in devising a funding plan and income support for farmers, the government will prevent them from having to secure high-interest rate loans from moneylenders.

It remains to be seen how the central government will finance the direct transfer, but the burden will likely be shared with state governments and involve the reallocation of funds from other agriculture schemes. On the other hand, if banks are against the idea of extending interest-free loans, the government will also be required to plug the interest gap.

However, all things considered, it makes considerably more sense than a blanket loan waiver, which only provides short-term relief and does nothing to correct the longer-term problems of the agriculture sector. Income support and cheap funding to farmers will keep rural demand and investment afloat and by extension, directly support economic growth.


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