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With Farmer Loans Waived Off, UP Govt Has Its Oh Darling Ye Hai India Moment

Apr 5, 2017


Given that I am a big film buff, I have watched my share of trashy cinema over the years and continue to do so. A particularly trashy film that I watched in 1995 (which was also the year that Dilwale Dulhaniya Le Jayenge (DDLJ) released) was called Oh Darling Ye Hai India, and like DDLJ it also happened to star Shah Rukh Khan.

The title song of the movie had the line: "Jo bacha nahi wo baant dia," which when translated into English essentially means, what has not been saved has already been distributed. Every time a government decides to waive off farmer loans, I am reminded of this song. And as I keep telling anyone who cares to listen, Hindi film lyricists have written songs for almost every situation that one can encounter in life, including farmer loans being waived off.

The question is why am I reminded of the song whenever a government waives off farmer loans or even talks about it. The government waiving off loans needs to compensate banks which had given loans to the farmers in the first place. Of course, the government hasn't saved money to pay off these banks. And in that sense what has not been saved has already been distributed.

The newly elected Yogi Adityanath government in Uttar Pradesh has decided to waive off loans worth Rs 30,729 crore to small and marginal farmers in the state. By doing this, it has met its major electoral promise. The state has 2.3 crore farmers. Of this number 1.85 crore are marginal farmers and 0.3 crore are small farmers. Farmers with landholdings of less than 2.5 acres are marginal farmers. Those with landholdings of 2.5 to 5 acres are considered as small farmers.

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The waive off amounting to Rs 30,729 crore will benefit 86.68 lakh small and marginal farmers in the state. Over and above this, the state government has also decided to settle bad loans of 7 lakh farmers worth Rs 5,630 crore, with banks.

This puts the total cost at Rs 36,359 crore. The first question that comes up is where is the government going to get this money from? As I said earlier, what has not been saved has been distributed. The state government will bear the cost of funding the farmer loan waive offs and the bad loans settlement with the banks, as well.

Can the state government afford this? The answer is no. In 2016-2017, the UP government was projected to run a fiscal deficit of Rs 49,961 crore or around 4.04 per cent of the state's gross domestic product (GDP). A government is said to run a fiscal deficit if its expenditure is more than its revenue during the course of the year. The state ended up running a fiscal deficit of Rs 55,020 crore or 4.45 per cent of the state GDP.

Hence, an expenditure of Rs 36,359 crore would add majorly to the state's fiscal deficit. It would also add to the overall fiscal deficit of India (i.e. the fiscal deficit the state governments plus the central government) which is extremely high to begin with. As Neelkanth Mishra of Credit Suisse wrote in a recent column in the Business Standard: "In the past seven years, even as the absolute fiscal deficit of the Union government has been largely unchanged, that of the state governments has increased two-and-a-half times."

The state government plans to issue farmer relief bonds in order to generate money for waiving off banks loans. Doubts have been raised whether investors would subscribe to these bonds given the bad financial state of the UP government. A guarantee from the government of India on these bonds is going to help.

I guess this forms one part of the argument. The move will not work out well for the UP government. Nevertheless, that was a given. And honestly, the last things many governments are bothered about is their financial position. So, how will this move work out for the farmers is the more important question.

No doubt it will provide them immediate relief to farmers facing two consecutive years of bad monsoons. At the same time, the state government deciding to settle the bad loans of nearly 7 lakh farmers, has made farmers who paid their loans on time, look like fools

Further, overall this move might not be such a great deal for the farmers. It is important to understand that the waive off does not take away the farmer's need to borrow money from banks in the days to come. As former RBI governor Raghuram Rajan said in a December 2014 speech: "In some states on certain occasions we have had debt waivers. How effective these debt waivers have been? In fact the studies that we have typically show that they have been ineffective. In fact they have constrained the credit flow post waiver to the farmers."

There are several ways in which farmers who have taken on the benefit of defaulting on bank loans, are denied loans in the time to come. As N Srinivasan, a rural finance consultant writes in the College of Agriculture Business magazine: "The experiences of the past show that there are many ways of denying credit to farmers who chose to benefit from default of bank loans. Delay in sanctions, high collateral requirements, reduction of quantum of loans, lengthy and complex documentation requests, etc. are some of the well known methods of denial of credit. These would be employed to good effect in the post- waiver situations by banks to cut their exposure to farm sector." And this is possibly not good news for the farmers. If banks deny them credit in the future, they will go back to the local moneylender.

The third constituent in the waive off are the banks. Given that they will be reimbursed by the Uttar Pradesh government, they will not face any losses on the loans that they had given to farmers. But as I had pointed out in the Diary entry dated March 23, 2017, the waive off will create the issue of moral hazard in the days to come.

The economist Alan Blinder in his book After the Music Stopped writes that the "central idea behind moral hazard is that people who are well insured against some risk are less likely to take pains (and incur costs) to avoid it."

This basically means that once the farmer sees a loan being waived off today, he will wait for elections in the future for the newer loans he takes on to be waived off as well. Essentially, he will see little incentive in repaying loans that he takes on in the future.

As the SBI Chairperson Arundhati Bhattacharya said recently: "We feel that in case of a (farm) loan waiver there is always a fall in credit discipline because the people who get the waiver have expectations of future waivers as well. As such future loans given often remain unpaid... Today, the loans will come back as the government will pay for it but when we disburse loans again then the farmers will wait for the next elections expecting another waiver." And this isn't possibly a good thing, if the idea is to promote financial inclusion and take banking to more and more people.

Over and above, all these points, the decision of the Uttar Pradesh to waive off loans, is likely to lead to a similar demand and decisions from other states. Such demands have already been made in Maharashtra. They may soon be made in other states where elections are due in the months to come. And this is something which isn't good for the nation as a whole.

If several state governments raise money in a quick time, it can push up interest rates as well, despite the fact that currently the demand for bank loans is low. It will also push up the combined fiscal deficit of the state governments and the central government, which as I said earlier in the piece, is already high.

To conclude, India, as well all know, is a land of contradictions. If one thing is true, then it's possible that the opposite maybe true as well.

Hence, this brings us to the last question of the day: "If banks can write-off lakhs of crore of corporate loans, why can't they be forced to waive off loans worth around Rs 36,000 crore?" Indeed, that is a good question to ask. (I know some people here would like to point out to me that a write off is different from a waive off. In case of a write off the bank can still try and recover the loan that has been defaulted on. I would request these people to look at the recovery rates of banks, before trying to explain the difference to me).

As I said at the beginning of this piece, Oh Darling Ye Hai India. And that perhaps, explains everything.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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12 Responses to "With Farmer Loans Waived Off, UP Govt Has Its Oh Darling Ye Hai India Moment"

Sarat Palat

Jun 29, 2017

This is nothing but a political game. We know the story of a person who was holding the tail of a tiger.Now the situation is any Govt. elected in the future need to follow the same pattern. I am not against this policy of waiving off agricultural loans. What is the permanent solution? Why can't we involve the insurance companies into this ? As a good gesture the Govt. could pay the insurance premium for marginal and small farmers. These sort of things should go to the needy. As mentioned who repaid their loans are fools. Next time they will also not repay. We know agriculture is the backbone of any country and farmers to be respected and should get a fair share for their efforts. Otherwise like any other loss making PSU undertaking and non performing Govt. staff, this will also become an additional permanent liability to the Central and State Govt.


B B Raina

Apr 7, 2017

Always go through your articles. Nice well researched pieces. Even though the recovery rates of banks is abysmally low that does not mean the loans cannot be recovered. Given the no nonsense approach of the present government, I believe the recovery rate will improve. And may be we can then see difference between write off and waive off.



Apr 6, 2017

The Question of bad debt is still unresolved, for various reasons and causes.

This is MUCH bigger than waiver.

NO responsibility ever ascertained even after 70 years.



Apr 6, 2017

It is unfortunate that in our country there is always an "incentive for non-performance " when it comes to repayment of either commercial or farmers loans. This is well entrenched in the minds of the industrialists / farmers, knowing fully well that there is this segment of tax payers who will be forced to bail them out at periodic intervals. Its a wake up call for the tax payers and its high time the nation wakes up and put an end to such vote bank politics .If the country is aiming at becoming a super power then such gimmicks has to stop. Waivers/ write offs / hair cuts does not serve any purpose,rather it spoils the credit discipline as pointed out by SBI chief.Instead the funds earmarked for waivers should be utilised for projects aimed at mitigating the problems faced due to drought conditions or excess production during good times. Any one using such facilities should be incentivised.Mr. Kaul may consider sending a petition to the Prime Minister highlighting the anguish of the tax payers.


Paul Villat

Apr 6, 2017

Any how, the loan waiver announced by U.P. Chief Minister is better option when compared with the ;farm loan waiver announced during last UPA regime by then Finance Minister Chidambaram. Here, the loan waiver is extended only to Marginal & small farmers only that too with a ceiling of Rs. 1 lakh.
in the farm loan waiver scheme of Chidambaram ,there was no restriction for land holding and no ceiling for loan amount.During the past many of the banks granted advances against the security of Gold Ornaments for agricultural purposes only to attain the priority sector target fixed by RBI for Agricultural Sector.Some big landlords availed the facility and diverted the funds for commercial purpose.They also got the benefit of Farm Loan waiver.I know one incidence where a person near to Erode in Tamilnadu owning one Engineering college, One Dental College and One Medical College got loan waiver of nearly Rs. 20 lakhs which was borrowed by him under Agricultural Gold Loan account.
Had Chidambaram, restricted the loan waiver to the poor and needy only that too with a ceiling , poor tax payers money would not have been taken over by big landlords.



Apr 6, 2017

Yeh hai India.We always look for short term remedies repeatedly. Governments should supply the needed materials instead of Money and insure their efforts for outcomes again through needed materials through costing systems for monitoring , assessing and controlling.

Like (1)

venkatasamy subburam

Apr 5, 2017

The core of the problem is not always looked at.The agriculture is mainly based on Monsoon. The failure of monsoon is the basic problem.The problem is water.Why not link the rivers which is long due since independence
The stalwarts of those days Nijalingappa from Karnataka, Kamaraj of Madras and many others who would have advocated the linking of rivers but the internationalist Nehru might have disregarded and discarded the agriculture following the so called soviet model.The result is now the benefit of pain to the Nation.The people also have tasted the sweetness of not paying the loans they borrow but also quoting Mallaya and others Where is the Country going ... .

Like (1)

Anand Tripathi

Apr 5, 2017

Dear Sir, I do not agree with your views which presents only one sided picture of economics. Injustice has been done to the efforts of farmers due to cheating done by middleman to them in terms of harvest purchase at ridiculously low prices which is aggravated by most inefficient storage facility of their produce. At the time of harvest ( due to poor storage facility of system & existing debt of farmers ) all farmers are FORCED to sell their produce at the same time causing a DIWALI time for middleman who buy say potato @ 2 - 5 /- per kg which is later sold by the vegetable vendors @ 20/- per kg. All the profit goes to middleman.

Whole system is designed to transfer wealth from Farmers to traders. Making the farmers poor generation after generation.

Bad debt in India is more than 10 lakh Crores ( 14% of all PSU banks deposits ) Is in bad debt of Industries. Mallayas & Ruias of India are running away with Public money is being financed with public wealth.

This step of providing some marginal staying powers in farmers hand should be welcomed & more efforts should be made to improve the storage system to provide pricing power in hands of Farmers.

Like (1)

Raj Kumar Kamboj

Apr 5, 2017

Farm loan waver is mis-use of tax-payers money. If it is to be done, shall be done with party's money.

Like (1)


Apr 5, 2017


This is once again a political tool to win votes. Nothing short of vote bank politics. However, what else any government for that matter could do. Any solution to this ever continuing problem for the poor farmers of the land. One thing that comes to my mind is all such loans for crops, seeds infrastructure, water etc should not be lend to these farmers directly and the middlemen who buys these products from poor farmers should be taking the responsibility to repay them as well. How our corporate sector which are run by millionaire entrepreneurs can contribute to this melody... when they want to use these crops for their organisational profits. But who will bell the cat ?

Like (1)
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