Farm loan waiver, why? Another crisis for Maharashtra?

Everywhere, everyone is debating and explaining his/her opinion on Maharashtra farm loan waiver. I am just trying to explain it with some data and evidence. Before discussing the FUTURE OF MAHARASHTRA ECONOMY, I would like to explain an importance of credit in agriculture sector.

Attempts to strengthen Indian agriculture must address not only farm production (farmers) but also processing, marketing, trade, and distribution. We must link farmers to markets. In this endeavor, marketing and rural credit systems are extremely important. (Acharya, S. S. (2006). Agricultural marketing and rural credit for strengthening Indian agriculture.).

The agriculture sector of Pakistan still suffers from low productivity, expensive financial support to the farmers, inefficient market structure and improper research. Thus to develop farming sector and to increase the farming efficiency it was recommended to enhance the accessibility of small and marginal farmer to formal agricultural credit. Loan for the livestock should be enhanced and this would definitely enhance farmer’s income and ultimately would reduce poverty (Ayaz, S., Anwar, S., Sial, M. H., & Hussain, Z. (2011). Role of agricultural credit on production efficiency of farming sector in Pakistan-a data envelopment analysis. Pak. j. life soc. Sci, 9(1), 38-44.)

Adequate availability of credit on time is an important requirement for the rural people, particularly under conditions of scarcity of resources and uncertainty. Convenient and safes-saving facilities are perhaps even more important to smooth out the peaks and troughs in incomes and expenditures in the rural arena. Lack of savings facilities also force families to rely on inefficient, inconvenient and costly alternatives. Agricultural credit can be a solution for this perspective. (Islam, A., Islam, D. R., Siddiqui, M. H., & Karim, L. (2014).

Importance of agricultural credit for rural development of Bangladesh: A descriptive approach. International Journal of Economics, Finance and Management Sciences, 2(1), 68-83.)

How agricultural credit should be provided? The famous agricultural economist Louis Tardy (1938) has laid the following criteria for good system of agricultural credit.

1. Credit should be granted for a sufficiently long period commensuarate with the length of operation, which it is designed to facilitate.

2. It should be granted at a reasonable rate of interest.

3. It should be adequately secured to avoid any abuse of credit facilities, but the security need not necessarily be material.

4. The security should, if necessary, be in the form of a personal credit secured mainly by the borrowers’ socio-moral standing and farming ability.

5. It should be related to the average yield and capacity for repayment of the farms, particularly during period of economic depression.

6. It should be placed in the hands of institutions the directors, which have received special training and had actual banking experience (http://shodhganga.inflibnet.ac.in/bitstream/10603/96016/12/12_chapter%203.pdf)

But if you observe our credit system in rural area, either people are engaged in informal sector where no one cares about these rules or formal sector is not interested to imply these rules. So it is not just about farm loan. It is about our credit system who forces our farmers into life time debt.

One might say that there are so many people who are not farmer but still getting benefit of agriculture scheme. Again it is not a problem of agriculture schemes. This problem is related to the system in which everything is implemented.

Again one might say that this announcement of government will throw our state in financial un-stability. Or government might increase tax rate to pay that amount.. Yes it might happen but there are so many other ways to finance given amount.

First of all I would like to discuss the finance condition of Maharashtra. 

First two diagrams show that the fiscal deficit and debt of Maharashtra state are very large. This might prove above point that it’s not good for our state. But if we see another two diagrams then you will realize that Maharashtra is in good shape. 

Debt as % of GSDP and fiscal deficit as % of GSDP both are not too bad. So we can afford this announcement. But this credit is very important as far as agricultural growth is concerned. If we have good monsoon this year, new credit will definitely help this sector (more than the given cost).. But this is not a permanent solution. We have to take some steps towards market reform. Market failure is not because of production or input it just because of unnecessary regulations which are imposed on farmers which are continuously reducing the realization of price for farmer.