Raghuram Rajan bats for banning of loan waiver promises in poll manifestos

STORY PICTURE - R B I GOVERNOR RAGHURAM RAJAN (File) Former RBI governor Raghuram Rajan | Janak Bhat

Just when it looked like the Modi government was toying with the idea of a loan waiver to farmers across the country, noted economist and former RBI governor Raghuram Rajan has pointed out that while the farm sector is in need of more resources, loan waiver may not be the best way to address agricultural distress. He further said if farm loan waiver would do any good to farmers in the long run is a debatable issue.

Rajan was speaking at a session on 'Economic Agenda for the Next Five Years', organised by the University of Chicago's Delhi Centre.

The former RBI governor went on to emphasise that farm loan waivers should not be part of poll promises and revealed that he has written to the Election Commission urging it to ensure that such promises do not get a place in election manifestos.

The ruling BJP has realised that the wrath of farmers was one of the reasons for the party's loss in the recently held assembly elections in three states— Rajasthan, Madhya Pradesh and Chhattisgarh—in the Hindi heartland. Sources suggest that the next Union Budget may address the issue of debt of farmers and may even announce a loan waiver, ahead of the Lok Sabha 2019 elections. While economists have been divided on whether waiving loans will address the issue, there seem to be more of them opposed to the idea on a host of grounds—primarily the fiscal deficit it would cause and the adverse impact it would have on the government's financial discipline.

"There is a reason to think of farm distress. But the question of whether the flows to farmers is best done by waiving loans, is debatable. There is only one set of farmers who benefit from those waivers. Often it goes to the best connected than to those who need it." Rajan pointed out.

A paper titled 'An Economic Strategy for India' authored by Rajan along with a number of other economists, was also presented at the event. According to the paper, agriculture has been identified as one of the sectors to be be given increased focus along with power, exports and banking. While it did not talk of loan waivers, it called for replacement of price support schemes “that are costly (because of corruption and inefficiencies in procurement and storage), ineffective (because procurement is not widespread, especially when and where most needed), and distortionary (because the wrong crops are incentivized)”.

Besides, the paper also mooted the possibility of the farmers receiving a large share of prices paid by consumers for the produces, long term land leasing, fixed cash subsidy per acre cultivated based on digitalising and identifying of plots as done under the Rythu Bandhu Scheme in Telengana, more investment in research around new seeds including genetically modified ones, latest farming and irrigation techniques, infrastructure, providing access to domestic and international markets by reducing fees, farmer/producer cooperatives, and improving the Fasal Bima Yojana to provide quick damage assessment and payout, among others.

"We need deep rooted transformation of agriculture, treating it not as a sector that has to be propped up through repeated sops, but as an engine of India’s job creation and growth. For that, it is imperative that we thoroughly reform agricultural and land policies. In particular, a key source of agrarian distress in recent years has been that the terms-of-trade confronting farmers has turned progressively more adverse, partly as a result of policies to combat food inflation. ", the report stated, elaborating that while low inflation is desirable in itself, the impact on farmers also needs to be taken into account.

"A policy priority should be to reduce distortions in farm product prices as well as input prices. Another important enabler is technology, both in educating and informing farmers, as well as in opening access to markets," the report noted.