This project has been undertaken with the objective of understanding the impact of freebies given in

election period in India. The period includes both pre and post-election freebies given with the main
focus on loan waiver as it comprises a large proportion of expenditure during elections. The waivers
of loans have been analysed on different parameters starting from shortlisting the states whose
condition are bad in terms of development and will be affected the most by giving freebies. Also, I
have analysed the impact in terms of its legality according to election commission by studying the
past judgement. Apart from this I have used other domains’ knowledge in analysing the impact such
the cultural impact on the whole society in the long run. The economic impact of freebies in terms of
burden on state and its financial benefits was also analysed. After considering all the impacts and
looking at other countries’ models, substitutes for the current situation were explored and an ideal
model was suggested for India. Going one step forward, I have tried to anticipate the challenges in
implementing the model and suggested methods to ensure effective application of the suggestions
in reality.

Why this project

Empirical research shows that GDP growth originating in agriculture is at least twice as effective in
reducing poverty as growth originating outside it

13 crore farmers involved

3 lakhs farmers suicides in the last 20 years

Farmers are life savers but they have now been forced to take their own life. -MS Swaminathan

History

From the 1970s, a lot of private investment in tube-well irrigation, farm mechanisation and
allied agricultural activities took place with bank credit support. After the establishment of
National Bank for Agriculture and Rural Development (NABARD) in 1982, institutional
credit flows not only accelerated, but also exhibited diversification to fund livestock and
horticultural along with assorted non-farm rural activities. Till around the late-eighties,
agricultural credit, one could say, was largely development-oriented. That changed first when
the Janata Dal-led government in 1990, at the initiative of the then Deputy Prime Minister
Chaudhary Devi Lal, announced a nationwide agricultural loan waiver (ALW). It resulted in
their cutting back on agricultural lending, to below even the Reserve Bank of India’s (RBI)
mandated minimum 18 per cent of total outstanding advances level. To address the situation,
a Rural Infrastructure Development Fund (RIDF) was, then, set up under NABARD in 1994-
95. This was followed by the introduction of the Kisan Credit Card (KCC) in 1999. Politics
and populism was, however, to soon return, beginning with the policy of “doubling of flow of
agricultural credit in three years” announced in the 2004-05 Union Budget. This was
furthered in 2006, with the provision of a 2 per cent interest subvention to enable farmers
avail KCC loans of up to Rs 3 lakh at 7 per cent per annum. Agriculture credit flows did
double between 2004-05 and 2007-08, but the then government also followed it up by
granting a second ALW just before the 2009 Lok Sabha elections. This one, too, had the
effect of moderating farm credit by banks. And in 2011, the Centre gave an additional 3 per
cent interest subvention on KCC loans, for which farmers had made prompt repayment. This
relief, however, didn’t reach the most needy. Nearly 90% of the farmers had taken loans from
private money lenders and, therefore, the impact of this largesse was limited, according to P
Sainath, a veteran journalist covering rural India.
States Analysis

There are many parameters on which various states can be analysed such as infant mortality
rate, crude death rate, life expectancy, total fertility rate, health infrastructure, debt as a % of GSDP,
state budget, HDI, etc. I have analysed the states on every parameter but given more weightage to
some important parameters such as HDI, debt as a % of GSDP, health infrastructure and college
indicators. The reason for giving more importance to these factors is their contribution towards
sustainable development which I believe should be beneficial for states in the long-term.
 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Average
India 0.43 0.43 0.44 0.45 0.45 0.46 0.47 0.47 0.48 0.49 0.49 0.50 0.51 0.52 0.53 0.54 0.54 0.56 0.56 0.57 0.58 0.59 0.60 0.61 0.62 0.63 0.64 0.64 0.53
Andaman and Nicobar Islands 0.69 0.70 0.71 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.71 0.71 0.72 0.72 0.73 0.74 0.73 0.73 0.72 0.72 0.72 0.72 0.72 0.73 0.73 0.74 0.74 0.72
Andhra Pradesh 0.42 0.43 0.43 0.44 0.44 0.45 0.46 0.46 0.46 0.47 0.47 0.48 0.49 0.51 0.52 0.53 0.54 0.55 0.56 0.57 0.58 0.59 0.60 0.61 0.62 0.63 0.64 0.64 0.52
Arunachal Pradesh 0.44 0.44 0.45 0.46 0.46 0.47 0.48 0.48 0.49 0.50 0.50 0.50 0.51 0.52 0.52 0.53 0.54 0.57 0.59 0.61 0.64 0.66 0.69 0.68 0.67 0.66 0.66 0.66 0.55
Assam 0.40 0.41 0.41 0.42 0.43 0.44 0.45 0.46 0.47 0.48 0.49 0.49 0.50 0.51 0.52 0.53 0.54 0.54 0.55 0.56 0.57 0.57 0.58 0.58 0.59 0.60 0.60 0.61 0.51
Bihar 0.37 0.38 0.38 0.39 0.40 0.40 0.41 0.41 0.42 0.43 0.43 0.43 0.44 0.45 0.46 0.47 0.47 0.48 0.49 0.50 0.51 0.52 0.53 0.54 0.55 0.55 0.56 0.57 0.46
Chandigarth 0.64 0.64 0.65 0.65 0.65 0.65 0.64 0.64 0.64 0.64 0.64 0.64 0.65 0.66 0.66 0.67 0.68 0.67 0.67 0.66 0.66 0.66 0.65 0.68 0.71 0.74 0.77 0.77 0.67
Chhattisgarh 0.55 0.56 0.57 0.56 0.56 0.56 0.56 0.56 0.55 0.55 0.56 0.56 0.56 0.57 0.57 0.58 0.59 0.58 0.58 0.57 0.57 0.57 0.57 0.57 0.58 0.59 0.60 0.60 0.57
Dadra and Nagar Haveli 0.67 0.68 0.69 0.69 0.69 0.68 0.69 0.68 0.68 0.68 0.69 0.69 0.69 0.70 0.71 0.71 0.72 0.72 0.71 0.70 0.70 0.70 0.70 0.69 0.68 0.67 0.66 0.66 0.69
Daman and Diu 0.65 0.66 0.67 0.67 0.67 0.67 0.67 0.67 0.66 0.67 0.67 0.67 0.67 0.68 0.69 0.69 0.70 0.70 0.69 0.69 0.69 0.68 0.68 0.69 0.69 0.70 0.70 0.71 0.68
Goa 0.56 0.57 0.58 0.58 0.59 0.59 0.60 0.60 0.61 0.61 0.62 0.63 0.64 0.66 0.67 0.68 0.70 0.71 0.72 0.73 0.75 0.76 0.78 0.77 0.77 0.77 0.76 0.76 0.67
Gujarat 0.47 0.47 0.48 0.49 0.49 0.50 0.50 0.51 0.51 0.52 0.53 0.53 0.54 0.55 0.56 0.57 0.58 0.59 0.60 0.60 0.61 0.62 0.62 0.63 0.64 0.65 0.66 0.67 0.56
Haryana 0.46 0.47 0.48 0.49 0.50 0.51 0.52 0.52 0.53 0.55 0.55 0.56 0.56 0.58 0.58 0.59 0.60 0.61 0.62 0.63 0.64 0.65 0.66 0.67 0.68 0.69 0.70 0.70 0.58
Himachal Pradesh 0.48 0.49 0.49 0.51 0.52 0.53 0.55 0.56 0.57 0.59 0.60 0.60 0.61 0.63 0.64 0.65 0.66 0.67 0.67 0.67 0.68 0.68 0.68 0.69 0.70 0.71 0.72 0.72 0.62
Jammu and Kashmir 0.50 0.50 0.51 0.51 0.51 0.52 0.52 0.52 0.52 0.52 0.53 0.54 0.55 0.57 0.58 0.59 0.60 0.62 0.63 0.63 0.65 0.66 0.67 0.67 0.68 0.68 0.68 0.68 0.58
Jharkhand 0.55 0.56 0.57 0.56 0.56 0.56 0.56 0.56 0.56 0.56 0.56 0.56 0.56 0.57 0.58 0.58 0.59 0.59 0.58 0.57 0.57 0.57 0.57 0.57 0.58 0.58 0.59 0.59 0.57
Karnataka 0.44 0.45 0.45 0.46 0.47 0.48 0.49 0.49 0.50 0.51 0.52 0.52 0.53 0.55 0.56 0.57 0.58 0.59 0.60 0.60 0.61 0.62 0.63 0.64 0.65 0.67 0.68 0.68 0.55
Kerala 0.56 0.56 0.57 0.57 0.58 0.58 0.58 0.59 0.59 0.59 0.61 0.62 0.64 0.66 0.67 0.69 0.71 0.72 0.72 0.72 0.73 0.74 0.74 0.75 0.76 0.77 0.78 0.78 0.66
Lakshadweep 0.70 0.70 0.72 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.72 0.73 0.73 0.74 0.74 0.74 0.74 0.73 0.73 0.73 0.72 0.73 0.74 0.74 0.75 0.75 0.72
Madhya Pradesh 0.40 0.40 0.41 0.41 0.42 0.43 0.43 0.43 0.44 0.44 0.45 0.46 0.46 0.48 0.48 0.49 0.50 0.51 0.52 0.52 0.53 0.54 0.55 0.56 0.57 0.58 0.59 0.59 0.49
Maharashtra 0.50 0.50 0.51 0.52 0.52 0.53 0.53 0.54 0.55 0.55 0.56 0.57 0.57 0.59 0.60 0.61 0.62 0.63 0.63 0.64 0.65 0.66 0.67 0.67 0.68 0.69 0.69 0.70 0.59
Manipur 0.50 0.50 0.51 0.52 0.52 0.53 0.54 0.54 0.55 0.56 0.56 0.57 0.57 0.59 0.59 0.60 0.61 0.63 0.65 0.67 0.69 0.71 0.73 0.72 0.71 0.70 0.69 0.70 0.61
Meghalaya 0.46 0.46 0.47 0.47 0.47 0.47 0.47 0.46 0.46 0.46 0.47 0.48 0.49 0.51 0.52 0.53 0.54 0.57 0.58 0.60 0.62 0.64 0.66 0.65 0.65 0.65 0.65 0.65 0.54
Mizoram 0.54 0.54 0.55 0.55 0.56 0.56 0.56 0.56 0.56 0.56 0.57 0.58 0.59 0.61 0.62 0.64 0.65 0.66 0.67 0.68 0.69 0.71 0.72 0.71 0.71 0.70 0.69 0.70 0.62
Nagaland 0.55 0.55 0.56 0.55 0.55 0.54 0.54 0.53 0.53 0.52 0.52 0.53 0.53 0.54 0.55 0.56 0.56 0.59 0.62 0.64 0.67 0.69 0.72 0.70 0.70 0.68 0.67 0.68 0.59
New Delhi 0.58 0.59 0.60 0.61 0.62 0.63 0.64 0.65 0.66 0.67 0.67 0.68 0.68 0.69 0.69 0.70 0.70 0.71 0.71 0.71 0.72 0.72 0.72 0.73 0.73 0.74 0.74 0.74 0.68
Orissa 0.39 0.40 0.41 0.41 0.42 0.42 0.43 0.43 0.44 0.45 0.45 0.46 0.46 0.47 0.48 0.49 0.50 0.51 0.52 0.52 0.53 0.54 0.55 0.56 0.57 0.58 0.59 0.60 0.49
Puducherry 0.72 0.73 0.74 0.74 0.74 0.74 0.74 0.73 0.73 0.73 0.74 0.74 0.74 0.75 0.76 0.77 0.77 0.77 0.77 0.76 0.76 0.75 0.75 0.75 0.75 0.74 0.74 0.74 0.74
Punjab 0.50 0.50 0.51 0.52 0.53 0.54 0.55 0.56 0.57 0.58 0.58 0.59 0.59 0.61 0.61 0.62 0.63 0.64 0.65 0.65 0.66 0.67 0.68 0.69 0.70 0.71 0.72 0.72 0.61
Rajasthan 0.40 0.40 0.41 0.42 0.43 0.43 0.44 0.44 0.45 0.46 0.46 0.47 0.47 0.49 0.50 0.51 0.51 0.52 0.53 0.54 0.55 0.56 0.57 0.58 0.59 0.60 0.62 0.62 0.50
Sikkim 0.54 0.55 0.55 0.55 0.55 0.55 0.55 0.54 0.54 0.54 0.55 0.56 0.56 0.58 0.59 0.60 0.61 0.62 0.63 0.63 0.64 0.65 0.66 0.67 0.69 0.70 0.71 0.72 0.60
Tamil Nadu 0.47 0.48 0.48 0.49 0.50 0.51 0.51 0.52 0.53 0.54 0.55 0.55 0.56 0.58 0.59 0.60 0.62 0.63 0.64 0.64 0.66 0.66 0.68 0.68 0.69 0.70 0.70 0.71 0.59
Telangana 0.62 0.63 0.64 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.65 0.65 0.65 0.66 0.66 0.65 0.64 0.64 0.64 0.64 0.64 0.65 0.66 0.66 0.66 0.64
Tripura 0.44 0.45 0.46 0.47 0.47 0.49 0.50 0.51 0.52 0.53 0.53 0.54 0.54 0.55 0.55 0.56 0.57 0.58 0.59 0.60 0.61 0.63 0.64 0.64 0.65 0.65 0.65 0.66 0.55
Uttar Pradesh 0.39 0.39 0.40 0.41 0.41 0.42 0.43 0.43 0.44 0.45 0.45 0.46 0.47 0.48 0.49 0.50 0.51 0.51 0.52 0.52 0.53 0.54 0.54 0.55 0.56 0.57 0.58 0.58 0.48
Uttaranchal 0.62 0.63 0.64 0.64 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.64 0.65 0.66 0.66 0.66 0.65 0.64 0.64 0.64 0.64 0.65 0.66 0.67 0.67 0.68 0.64
West Bengal 0.44 0.44 0.45 0.46 0.46 0.47 0.48 0.49 0.49 0.50 0.51 0.51 0.51 0.53 0.53 0.54 0.55 0.56 0.56 0.57 0.58 0.58 0.59 0.60 0.61 0.62 0.63 0.64 0.53

After considering all the factors we can see that the level of development in states announcing loan
waivers is very low and require long-term investments instead of short-term bandage. These states
announce agriculture loan waivers just to win the elections and have myopic view about the
development of the country as a whole.

Legal Aspect:

The legal aspect of distributing freebies has been analysed by using the case Subramaniam Balaji V.
State of Tamil Nadu (2013). The case relates to distribution of freebies by The Dravida Munnetra
Kazhagam (DMK) while releasing the election manifesto for the Assembly Elections 2006 by
announcing a Scheme of free distribution of Colour Television Sets (CTVs) to each and every
household which did not possess the same, if the said party/its alliance were elected to power. The
Party justified the decision of distribution of free CTVs for the purpose of providing recreation and
general knowledge to the household women, more particularly, those living in the rural areas. The
DMK won the State Assembly Election and decided to implement the Scheme with a provision of Rs.
750 crores was made in the budget for implementing the same. This was challenged by the appellant
continuously in 2006 and 2011 after each winning govt. gave freebies. The contentions by the Mr.
Arvind P. Datar (appellant) were a) Article 282 of the Constitution of India only permits defraying of
funds from the Consolidated Fund of the State for “public purpose”; b) The distributions made by
the respondent-State is violative of Article 14 since there is no reasonable classification; c) Promises
of free distribution of non-essential commodities in an election manifesto amounts to electoral bribe
under Section 123 of the RP Act; d) The Comptroller and Auditor General of India has a duty to
examine expenditures even before they are deployed; and e) Safeguards must be built into schemes
to ensure that the distribution is made for a public purpose and is not misused.

It is further stated that the spending on free distribution must be weighed against the public benefits
that ensue from it and only if the public benefits outweigh the same, can the spending be classified
as being for a public purpose. Public spending on these goods to the tune of Rs.9000 crores far
outweighs any public benefit that might arise from such distributions

Summary:
(i) After examining and considering the parameters laid in Section 123 of RP Act, we arrived at a
conclusion that the promises in the election manifesto cannot be read into Section 123 for declaring
it to be a corrupt practice. Thus, promises in the election manifesto do not constitute as a corrupt
practice under the prevailing law. A reference to a decision of this Court will be timely. In Prof.
Ramchandra G. Kapse vs. Haribansh Ramakbal Singh (1996) 1 SCC 206 this Court held that “..Ex facie
contents of a manifesto, by itself, cannot be a corrupt practice committed by a candidate of that
party.”

(ii) Further, it has been decided that the schemes challenged in this writ petition falls within the
realm of fulfilling the Directive Principles of State Policy thereby falling within the scope of public
purpose.

(iii) The mandate of the Constitution provides various checks and balances before a Scheme can be
implemented. Therefore, as long as the schemes come within the realm of public purpose and
monies withdrawn for the implementation of schemes by passing suitable Appropriation Bill, the
court has limited jurisdiction to interfere in such schemes.

(iv) We have also emphasized on the fact that judicial interference is permissible only when the
action of the government is unconstitutional or contrary to a statutory provision and not when such
action is not wise or that the extent of expenditure is not for the good of the State.

(v) It is also asserted that the schemes challenged under this petition are in consonance with Article
14 of the Constitution.

(vi) As there is no legislative vacuum in the case on hand, the scope for application of Vishaka
principle does not arise.

(vii) The duty of the CAG will arise only after the expenditure has incurred.

(viii) Since this petition is fit for dismissal dehors the jurisdiction issue, the issue of jurisdiction is left
open.

Directions:

77) Although, the law is obvious that the promises in the election manifesto cannot be construed as
‘corrupt practice’ under Section 123 of RP Act, the reality cannot be ruled out that distribution of
freebies of any kind, undoubtedly, influences all people. It shakes the root of free and fair elections
to a large degree. The Election Commission through its counsel also conveyed the same feeling both
in the affidavit and in the argument that the promise of such freebies at government cost disturbs
the level playing field and vitiates the electoral process and thereby expressed willingness to
implement any directions or decision of this Court in this regard.

78) As observed in the earlier part of the judgment, this Court has limited power to issue directions
to the legislature to legislate on a particular issue. However, the Election Commission, in order to
ensure level playing field between the contesting parties and candidates in elections and also in
order to see that the purity of the election process does not get vitiated, as in past been issuing
instructions under the Model Code of Conduct. The fountainhead of the powers under which the
commission issues these orders is Article 324 of the Constitution, which mandates the commission
to hold free and fair elections. It is equally imperative to acknowledge that the Election Commission
cannot issue such orders if the subject matter of the order of commission is covered by a legislative
measure.
79) Therefore, considering that there is no enactment that directly governs the contents of the
election manifesto, we hereby direct the Election Commission to frame guidelines for the same in
consultation with all the recognized political parties as when it had acted while framing guidelines
for general conduct of the candidates, meetings, processions, polling day, party in power etc. In the
similar way, a separate head for guidelines for election manifesto released by a political party can
also be included in the Model Code of Conduct for the Guidance of Political Parties & Candidates.
We are mindful of the fact that generally political parties release their election manifesto before the
announcement of election date, in that scenario, strictly speaking, the Election Commission will not
have the authority to regulate any act which is done before the announcement of the date.
Nevertheless, an exception can be made in this regard as the purpose of election manifesto is
directly associated with the election process.

80) We hereby direct the Election Commission to take up this task as early as possible owing to its
utmost importance. We also record the need for a separate legislation to be passed by the
legislature in this regard for governing the political parties in our democratic society.

81) In the light of the above discussion, taking note of statutory provisions of the RP Act, which
controls only candidate or his agent, mandates provided under the directive principles, various
guidelines such as income limit, preference to women, agricultural labourer etc as detailed in the
counter affidavit by the State, we find no merit in the appeal as well as in the transferred case. With
the above observation as mentioned in paragraph Nos. 77-80, the appeal and the transferred case
are dismissed. No order as to costs.

Cultural Impact: Gresham's law: When the good circulates with the bad, bad drives out the good.
(Try to use it somehow)

Most often, savings generated from unremunerative crop enterprise are inadequate for such
investments. Rising expenses on health, education, social ceremonies and non-food items put
additional financial demand on farm families.

A NITI Aayog study had also highlighted the fact that in some States, about three-fourths of the farm
loans were being used for consumption instead of meeting agricultural needs, Professor Chand says.
The Reserve Bank of India’s study, ‘State Finances: A Study of Budgets,’ released earlier this year,
analysed the previous experiences with loan-waiver schemes in various States and concluded that
“debt relief helps in reducing household debt but there appears to be no evidence of increase in
investment and productivity of beneficiary households.”

The loan waivers have a societal impact in terms of behaviour not good for the banks. Whenever the
announcement is made the farmers stops the repayment schedule. This even happens for the
farmers who have enough resources to payback. The spiral effect on the society in terms of
neighbouring farmers benefitting of waivers makes the capable farmers to hurt economy by not
paying on time.

They represent bad economics, bad banking and promote the wrong type of social values. This is
because farmers are, conventionally, among the most honest of borrowers. They consider it their
moral obligation to redeem the loans taken by their forefathers as well. Suddenly, when a leader
tells these people not to pay off loans, it teaches them the wrong values. What is worse is that, once
a farmer does not pay back his loan, the banks begin to shun him (who eventually bears the cost –
bank or government -- is immaterial, because either way, it is the small base of taxpayers who bear
the burden. Farming is exempt from income tax). When the banks become reluctant to lend to the
farmer, he has no option but to go to the moneylender. Farm loan waivers invariably make the
moneylender stronger

Asserting that a loan waiver creates economic crises and there is policy paralysis in the government,
national traders body Confederation of All India Traders (CAIT) has demanded the loan waiver
scheme for traders in the country. CAIT has said that people contribute tax in the hope of national
and economic development and not for making discretionary loan waivers with no logical reasons.

Economic Impact:

Since April 2017, at least eight state governments have promised to waive over ₹1.9 trillion in farm
loans in line with the pre-poll promises.

The farmers in the country take loans for the investment in farm machinery and purchase of inputs
like seed, fertiliser, agri-chemicals, diesel and hired labour. The sources available to them are
institutional lending and money lenders.

The Reserve Bank of India's Financial Stability Report says that gross non-performing assets in
agricultural bank loans went up from around 5 percent of advances to the sector in March 2017 to
8.4 percent by September 2018. That's a rather steep deterioration. The stressed assets ratio in
agriculture now stands at 8.6 percent.

Madhya Pradesh has announced waiver for loans up to Rs 2 lakh covering about 35 lakh
farmers. Chhattisgarh loan waiver is likely to cost Rs 6,100 crore and will benefit 16 lakh
farmers. In Rajasthan, it will cost Rs 18,000 crore and benefit 30 lakh farmers. Now, due to
the loan waiver, banks are unlikely to get repayments for a substantial part of Rs 1.47 lakh
crore. Thus, their corpus for next fiscal lending to farmers would go down as banks don't
have a financial margin to pump more money and they only circulate the repayments back as
fresh loans. If banks don't get repayment of loans due to the disrupted repayment cycle,
where will they get funds to lend for the next cycle? Then farm sector non-performing assets
(NPAs) of banks are bound to go up.

Since 2017, farm loan waivers have already put an enormous burden on state finances.
Maharashtra's loan waiver of Rs 34,000 crore amounted to 1.3 per cent of GSDP. Uttar
Pradesh's Rs 36,000 crore amounted to 2.7 per cent of GSDP, Punjab's Rs 10,000 crore
worked out to 2.1 per cent of GSDP. Rajasthan's waiver of Rs 8,000 crore in February 2018
amounted to 0.9 per cent of GSDP.

With these sops in 2017-18, the respective states crossed the comfort threshold of 3 per cent
in gross fiscal deficit (GFD) to gross domestic product (GDP) ratio.

The credit culture gets affected leading to economic problems. Take the case of the State
Bank of India (SBI), the country’s largest lender. Its NPAs stood at 6.4% before June 2017
when farm-loan waivers were announced in UP and Maharashtra. By September 2018, this
rose to 11.4%, according to a report by Macquarie Research. For the sector as a whole, before
the 2008 loan waivers, agricultural NPAs had stood at 2%. This shot up to 6% in 2017.
Overall, revenue from the new goods and services tax (GST) regime still remains low. At
such a time, waivers can come as a double whammy.

One study looks at responses to farmer distress in Rajasthan. Results from our analysis show
that waiving formal loans for land holders with less than two hectares would cost ₹11,731
crore. The benefits will be slightly lower at ₹9,537crore. Giving out a rupee to achieve just 80
paise of benefit is a poor deal. It also means a 15% reduction in smallholder credit over the
following years, cutting revenue for the most vulnerable farmers by 13.5%. It makes
economic sense to build more warehouses and storage facilities. This will reduce waste of
perishable fruits, vegetables and milk that command a higher market price than staple crops.
Most small farmers do not risk growing perishable crops. Nearly 20% of India’s fresh
produce is wasted because of storage problems. Also, small farmers, because of the lack of
adequate storage facilities, often sell their output forward to the village-level aggregators
(arthiya) from whom they typically take loans for growing crops at a higher rate. The
National Centre for Cold Chain Development (NCCD) has estimated Rajasthan’s total
requirement for storing milk, fruits and vegetables at 74,889 tonnes. Providing pack houses
and trucks would cost ₹5,985 crore. The benefits in terms of the reduced wastage in milk,
fruits and vegetables, are worth more than 15 times that figure. In Rajasthan, the largest
producer of coarse grains, the research suggests that e-markets could result in better prices.
Rajasthan has 114 agricultural markets that are yet to be “e-enabled”. Factoring in the one-
time total, fixed cost of introducing e-mandi, and operational costs increasing over time, the
annualized cost of setting up and running e-mandis over 20 years is ₹131 crore. Farmers
would realize better prices with reduced information asymmetry and direct market access,
meaning a 13% price increase— basically a transfer from middlemen to farmers. The
research suggests that farmers would gain ₹8,523 crore over 20 years. Benefits are an
astonishing 65 times the costs

Economic theory suggests that waiving debts via such a scheme will lead to debt overhang
(essentially stagnated investments due to any new income being used largely for paying back
old debts)

To better understand the shortcomings of unconditional farm loan waivers, it is important to

consider it from the perspective of the potential beneficiary. A farmer who is eligible for loan
waivers faces two problems well-documented in finance and economics. First, there is the
risk of inducing strategic default due to moral hazard. This simply means that because the
farmer knows that the loan will be waived in the future, she will strictly prefer to default on
the loan rather than work towards repayment.

Another reason that could be at play here relates to the vicious cycle of debt that sometimes
characterizes farm households in India. The problem of self-control, as suggested by Chicago
behavioural economist Sendhil Mullainathan and colleagues, could exacerbate debt cycles for
poor farmers in particular.

Indeed, as behavioural economics shows, there could be a range of factors spurring farmers to
continue taking risky loans from the informal or formal sectors even when they know that
these are harmful. For example, they could be biased towards present-day consumption or
investment and, therefore, put off more productive investments in technology (e.g., farm
equipment) in favour of paying off interest on other loans. They might also be falsely
optimistic about their chances of paying off a loan without having to take another loan, which
is exactly where expectations of a waiver in the future can have adverse effects.
If the Centre follows the Telangana’s investment support of Rs 8,000 per acre to farmers in a
year, the cost for a national level scheme would be about Rs 2.6 lakh crore (net sown area 33
crore acre).

States have low fiscal space to invest after waiving loans.

On an incremental basis, banks disbursed only 6.37% of total credit in FY2018 to agriculture, the
lowest in a decade.

Criticism: According to agriculture policy expert and NITI Aayog member Ramesh Chand, the number
of farmers, especially the small and marginal who avail themselves of institutional loans, are very
few and this is the reason that even after spending huge sums of money on loan waivers not even
half the farmers are benefiting. In some of the States, not even 25% of farmers get loans from
institutional sources.

The success of the loan waiver lies on the extent to which the benefits reach the needy farmers.
Loan waivers suffer from several drawbacks in this respect. First, it covers only a tiny fraction of
farmers. According to 2012-13 NSS-SAS, 48% of the agricultural households did not have any
outstanding loan. Further, out of the indebted agricultural households, about 39% borrowed only
from non-institutional sources. Second, it provides only a partial relief to the indebted farmers as
about half of the institutional borrowing of a cultivator is for non-farm purposes. Third, in many
cases, one household has multiple loans either from different sources or in the name of different
family members, which entitles it to multiple loan waiving. Fourth, loan waiving excludes agricultural
labourers who are even weaker than cultivators in bearing the consequences of economic distress.
Fifth, it severely erodes the credit culture, with dire long-run consequences to the banking business.
Sixth, the scheme is prone to serious exclusion and inclusion errors, as evidenced by the Comptroller
and Auditor General’s (CAG) findings in the Agricultural Debt Waiver and Debt Relief Scheme, 2008.
(According to the CAG report, 13.46% of the accounts which were actually eligible for the benefits
under the scheme were not considered by the lending institutes while preparing the list of eligible
farmers. On the other hand, in 8.5% of the cases, the beneficiaries were not eligible for either debt
waiver or debt relief but were granted the benefits. Further, 34.28% of the beneficiaries were not
issued debt relief certificates which would have entitled them to fresh loans)

According to a Business Standard report, in the four states -- Uttar Pradesh, Maharashtra, Karnataka,
and Punjab -- only 40 per cent of the promised amount has been waived to date, and just half the
beneficiaries have benefited.

Earlier loan waiver announcements have also proved that a less percentage of people benefit from
such schemes. Past experiences show that state governments had not been able to implement loan
waivers scheme successfully. One of the main reasons for the unsuccessful implementation of this
scheme is too much documentation. Farmers are usually not educated enough to understand their
eligibility for loan types or loan application process and ultimately fail to meet bank requirements.

Other Countries Examples:

Another idea goes beyond agricultural credit and into the realm of broader agricultural policy.
Such policy must consist of multiple avenues to ensure a farmer’s ability to deal with
negative shocks to her income.
This could include encouraging adoption of appropriate crop insurance products that operate
along pay-on-harvest lines, as found to be effective in reducing farmer vulnerability in
Kenya.

Chinese Town and Village Entrepreneurs

Substitutes:

For providing substitutes we need to understand the problem of farmers in deep. So, according to
Swaminathan Report by National Commission on Farmers, the causes of the farmers’ distress are:

 Land reforms
o About 85% of the operational landholdings in the country are below 5 acres and 67%
farm households survive on an average landholding of one acre.
 Water supply
o More than half of the area under cultivation does not have access to irrigation
 Technology fatigue
 Access, adequacy and timeliness of institutional credit
o Institutional credit largely excludes small and marginal farmers. Instead, the latter
take loans from moneylenders at usurious interest rates from 24% to 48%.
o A more worrisome fact out of NSS surveys on Investment and Debt (NSS-I&D) is that
the loans taken by cultivators from non-institutional sources, which involve high
interest rate, is rising faster than from institutional sources.
o Only 15% of the marginal farmers (with less than 2 hectares of landholding) have
access to formal credit, and loan waiver schemes typically cater to farmers who have
availed of formal loans
 Opportunities for assured and remunerative marketing
 Weather-disaster
 Price

Other Causes: The rising pressure of population on land and agriculture, besides sluggishness in the
shifting of workforce away from agriculture

MSPs are limited to a few crops. Also, MSP doesn’t fulfil C2+50 criteria. A2 costs basically cover all
paid-out expenses, both in cash and in kind, incurred by farmers on seeds, fertilisers, chemicals,
hired labour, fuel, irrigation, etc. A2+FL cover actual paid-out costs plus an imputed value of unpaid
family labour. C2 costs are more comprehensive, accounting for the rentals and interest forgone on
owned land and fixed capital assets respectively, on top of A2+FL.
The distribution of benefits is highly skewed in favour of farmers of only a few states, and that too to
a small percentage of them. For wheat, 25% of the production is procured from 3% of farmers. In
Uttar Pradesh, which has 43% of India’s wheat-growing farmers, only 7% receive MSP benefits. In
Punjab, only 3% of wheat-growing farmers get 80% of the benefits

Out of 120 million tonnes of wheat produced, only 33 million tonnes are procured to build a buffer
of the desired level. Policymakers’ obsession with food grains is bewildering and a hangover of
India’s period of food scarcity.

Grains cover 64% of cropped area, but only 25% of output value. For the last 20 years, India is
exporting a significant amount of grain surplus. Despite that, there is no attempt to reduce grain-
growing areas, or any sign of diversification. This is partly because of MSP and production distorting
policies, such as near-free energy and water

Considering all the causes the solution for the problems the solutions are majored under following
heads:
 Short Term:
o Rythu Bandhu Scheme- Madan, who owns two acres, is expecting his second cheque
now for the winter crop season. “At the beginning of the farming season, most of us
who own small plots of land don’t have ready cash and end up borrowing at very
high interest rates,” he said.
income transfers are more equitable and do not impact either the banking
ecosystem (leading to defaults by farmers and banks advancing lower volumes of
fresh credit) or crop choices (like growing sugarcane in water-scarce Maharashtra).
Income transfers are inclusive, easy to administer and less prone to leakage, but
state governments like Telangana must find a way to include tenant farmers and
landless agricultural labourers,
o farmers need to be freed of the tyranny of the middlemen by reforming the rent-
seeking, anti-farmer commission agent (arthiya) system. The inter-locking of the
credit and the output markets is a major factor for the crises of indebtedness.
o For providing immediate relief to the needy farmers, a more inclusive alternative
approach is to identify the vulnerable farmers’ based on certain criteria and give an
equal amount as financial relief to the vulnerable and distressed families. For
instance, in Uttar Pradesh 23.2% (41.87 lakh) agricultural households (180.49 lakh)
are estimated to have income below poverty line. With ₹36,000 crore, each of these
households can be given ₹85,980. This looks to be a more inclusive approach and
provides farmers flexibility to spend this money.
 Long Term:
o In the long run, there’s an urgent need for integration of agriculture with industry,
and that too with the involvement of the local workforce in such a manner that
surpluses should be invested locally.
o “The subsidies and tax concessions which have been offered or given to the
corporate sector should be given to rural entrepreneurs who are willing to start
manufacturing firms that will process local raw materials and employ rural labour.
The transformation is possible if primary producers are integrated with both
manufacturing and marketing activities for reaping surpluses generated by them,”
Lakhwinder Singh, an agriculture expert and a professor of economics at Punjabi
University, Patiala says.
o The problem of moneylenders can become part of the solution by formalising these
moneylenders as non-banking financial companies (NBFCs) with their being
permitted to charge interest up to 5% above the bank rate.
o If a land lease market can be facilitated by the government (by being the witness
and protector), long leases will be possible. Then, with some areas going for contract
farming and entrepreneurs coming in with capital and technology, agriculture can be
freed from its vicious cycle of declining productivity and falling prices. This can be
justified by the example of China (Refer to IFS case).

o Rules of agricultural produce market committees (APMCs) need to be

changed to allow farmers to sell, if not all, at least 75% of their produce in the
open market and online trade. (Market Side Solution)
o Statutorily imposed market(ing) rigidities in agricultural commodities and
other farm produce erect another impediment in the growth of rural sectors by
denying free access between the farmer and ultimate consumer. This has been
affected by the implementation of archaic Agricultural produce market
 committee (APMC) Act. Direct buying from the farmer by the traders,
processors or exporters is prohibited. To the complete exclusion of private
intermediates, only state governments can establish agri-markets which are
overwhelmingly controlled by licenced commission agents with strong
political backing. (Market Side Solution)
o Essential Commodities Act 1955 also needs a relook as restrictions under its
aegis imposed on the holding of agri-commodities are detrimental to the rural
farming community. Of course, balancing of consumer’s interests will need to
be done carefully. Likewise, import and export controls require to be regulated
with extreme caution e.g. current controls on onion exports is not justified
when there is a glut in domestic market leading to the suppression of prices to
an abysmally low level and ruling overseas prices are way higher. (Market
Side Solution) The Organization for Economic Co-operation and
Development (OECD) estimates that the average yearly revenue lost by Indian
farmers between 2014 and 2016 on account of export restrictions, net of
subsidies received, is ₹1.65 trillion.
o Storage facility, including cold storage, will help avoid distress sale and stagger sales
to avoid mismatches in demand and supply. The supply chain needs to be
compressed to minimise wastage and loss of value. (Supply Chain Problem)
o Cognisant of the fact that farmers are price takers and distress sellers, Prof. Desarda
suggested that not only should farmers be given minimum support prices, but there
must be a procurement guarantee as well.

So, what is good for agriculture is often not good for agriculturists

Going to villages to identify farmers who are seriously affected and need loan waivers.

Stories: Parv Kapoor, a 26-year-old graduate in biotechnology from Manipal University, took
up farming in 2015 soon after completing his graduation. Now he owns 40 acres in Shahpura
village near Bhopal.

Kapoor insists that “funds should be utilised in knowledge-based agriculture”.

“Fortunately, I come from a strong business background and can bear risks, but the common
farmers do not have such a buffer,” he explains.

Talking about innovations in farming, he says, “I used to visit others' farms to learn about
innovative technology and took the help of traditional farmers to implement the practices.
Farming is challenging, as one cannot be sure of the amount and rate of produce. In such an
environment, a farm loan waiver is not the solution, as farmers may fall into the debt trap
again."

Kapoor stressed on areas which should be the focus of the government. “I see that farmers in
my team have benefited from the waiver, but it is not going to help in the long run. The
government could have pumped this money into creating knowledge-based agriculture,” he
adds.

He explained how farmers have no control over their investment and the failure of insurance
schemes. “I had cultivated urad in 2017 on 15 acres of land with an investment of Rs 2.5
lakh. But the crop failed. I got the insurance claim in 2018 after a year’s wait. There are many
such government schemes but the funds can be better spent in creating awareness about
innovative and organic farming,” Kapoor points out, suggesting that the government should
improve mechanisms to provide subsidy on farm equipment than give loan sops, and form a
body to regulate the minimum support price (MSP) in the private market.

For Prateek Sharma, a former banker with Kotak Mahindra Bank who now runs the startup
Green and Grains in Dhaba Khurd village 100 kilometres away from Bhopal, a digital
marketplace and production control are the solutions to farming problems.

Sharma, despite belonging to a family of farmers, had to face unexpected problems after
entering the sector – mainly lack of funding and market interest.

Like the others, he too says farm loan waivers are of no help as many farmers have taken
Kisan Credit Card loans from private banks. “What is needed is a mechanism to calculate the
demand of agro-products before farmers start with cultivation, as they are usually clueless
about demand and have to often slash prices of their produce due to overproduction,” he
explains.

Instead of wasting money on loan waivers, Sharma says, the government can allot funds to
create a digital marketplace. The money can be further used for procurement of farm produce
for the next few years and then to store, market and sell it to processing units, and even to
export. “The funds could have been used to set up basic infrastructure such as food
processing units, cold storage and warehouses in every district of Madhya Pradesh,” Sharma
adds.

On the financial burden of the waiver on the state, Sharma pointed to the assessment of the
State Level Bankers’ Committee. “Around Rs 50,000 crore is the amount to be waived off.
Banks are happy as they will be relieved from the risk of bad debts, but it will affect the
economy in a bad way,” he says.

Swapnil Tripathi, an entrepreneur operating the agri-startup Lok Kalyan which works in
Madhya Pradesh's tribal areas to curb migration, echoed Sharma, asking the government to
invest in creating a platform for farm produce – something that his startup is doing on a small
scale with impressive results.

“The artisans are repaying the small loans they take in self-help groups and are multiplying
their profits too. The government should support this model on a large scale,” Tripathi says.

Recent News:

After the recent Assembly elections, the new governments in Rajasthan, Madhya Pradesh and
Chhattisgarh announced farm loan waivers, a key promise. Last year, Uttar Pradesh, Maharashtra,
Karnataka and Tamil Nadu announced waivers as farmers were in distress. Andhra Pradesh, Odisha
and Haryana are likely to announce sops ahead of elections.
For instance, loan waiver may cost Uttar Pradesh at least ₹36,000 crore, which is 4.4 times the
State’s capital expenditure of ₹8,191 crore (Budget estimate) in agriculture, including irrigation and
flood management, in 2016-17.

There is no concrete evidence on reduction in agrarian distress following the first spell of all-India
farm loan waiver in 2008.

“I had a loan of over ₹1 lakh and it is more or less the same now, since the waiver did not happen at
once. I received a notice to clear my loan a few weeks ago. So it was of no use,” said B. Mahesh
Reddy, a farmer from Siddipet district

According to India’s National Crime Records Bureau, the number of farmer suicides has
actually been falling in recent years; fewer such deaths were recorded in 2016 than at any
time in the previous 16 years.

Nor does there seem to be a clear link between farmer suicides and poverty. Suicide mortality rates
are higher in the relatively wealthy states of Maharashtra and Andhra Pradesh than in poorer Bihar
and Uttar Pradesh. If one examines the incidence of indebtedness—the percentage of households
that owe money to banks or moneylenders—it’s true that poorer farmers tend to owe more. They
have a much higher debt-to-asset ratio and hold more formal and informal loans than richer
households do.

But they’re not the ones killing themselves. According to data from the National Sample Survey
Office, nearly 90% of the farmers who committed suicide in Maharashtra owned more than two
acres of land. Six out of 10 owned more than four acres. In high-suicide Maharashtra, formal loans
account for 87% of total outstanding debt—far above the national average of 57%. Second, loans are
clearly not the only source of farmer distress. While “indebtedness” has been rising as a cause of
farmer suicides since the government began measuring them separately in 2014, the most
commonly cited causes of suicide in India historically have been “family problems” or “illness.” The
latter especially has seldom received enough policy attention in the past decades. Access to
healthcare, as well as to rural infrastructure, obviously plays a role in determining how optimistic
and secure farmers feel

Perhaps the single best achievement of the Modi government in the economic sphere has been its
reform of the insolvency legislation. This will be a game changer. Debtors cannot escape repayment
or sequestration of their assets. If that logic is to be followed, farmers should not get repeat write-
offs of debts. The rule should be that if a farmer has come repeatedly, say thrice, for a loan waiver
then he has to sell his land. This may sound harsh. It is, however, a question of equity. Farmers are
private sector business people. They are presumed to be poor and struggling, though they own land
and agricultural incomes are tax exempt. They qualify for loan waivers.

A more creative strategy would be to combine debt cancellation with the facility to quit farming. If
not for the present generation of cultivators, then at least for their children. Debt cancellation
should require the guarantee that children will relocate. Governments could incentivise this by
giving stipends to learn a new trade. The long-run aim should be to shrink the number of farmers.
The policy should be to retain only those farmers who are financially responsible, economically
efficient and not a burden on the public fisc

The unique aspect of the ongoing farmers’ movement is that their demand goes beyond a
one-time loan waiver — they want enactment of a law for freedom from indebtedness. The
Bill, which has been developed by the All India Kisan Sangharsh Coordination Committee,
incorporates two key elements of reform: a functional institutional credit system which is
accessible and accountable to all cultivators, and protection from debt trap in bad years.

First, it guarantees all farmer access to institutional credit; this covers not only land-owning
farmers but also sharecroppers, tenants, adivasi and women farmers, and animal-rearers. It
requires the registration of all cultivators and providing them Kisan credit cards. This is
critical because marginal and landless farmers are mostly excluded from institutional credit,
thereby putting them at the mercy of predatory lending by moneylenders and input dealers.
Tenant farmers who lease land from other land owners are especially vulnerable. A study by
Rythu Swarajya Vedika in June 2018 showed that 75% of farmer suicides in Telangana are
by tenant farmers. The NSSO Situation Assessment Survey (2013) showed that the average
debt from institutional sources for small and marginal farmers was only ₹17,570 per
household, and ₹1,41,804 for medium and large farmers. The Reserve Bank of India did issue
guidelines in 2014 for extending loans to Bhoomi Heen Kisan (landless farmers) and for a
debt-swapping scheme to convert informal loans of farmers into bank loans, but they have
remained on paper.

Second, it establishes farmers’ distress and disaster relief commissions at the national and
State levels, based on the model of Kerala’s Farmers’ Debt Relief Commission. Based on
incidences of natural disasters, extensive pest attack and such calamities, the commission can
recommend declaration of certain areas or crops as distress-affected in any particular year.
Thereafter, it has the power to order measures of debt relief, which may include loan
rescheduling, interest waiver, one-time settlement, discharge of debt in instalments, or, in an
extreme situation, immediate discharge of debt. The State-level commission is also
empowered to pass orders regarding non-institutional loans of distress-affected farmers.

Table 2: Comparative Yield of Select Crops in Various Countries (Kg/ha)

Country Crop
Paddy Wheat Maize Groundnut Sugarcane
India 2929 2583 1667 913 68012
China 6321 3969 4880 2799 85294
Japan 6414 - - 2336 -
SA 6622 2872 8398 3038 80787
Indonesia 4261 - 2646 1523 -
Canada - 2591 7974 - -
Vietnam 3845 2711 4313 1336 65689

Source: Table 3 of the Fifth NCF Report based on Agriculture At a Glance [2002] Ministry of
Agriculture
Santa never brings essentials like vaccines, school fees, vitamins or books. Santa only brings little
trinkets and treats. The plight of farmers is similar—loan waivers will neither increase farmer
productivity nor help them escape poverty; it only provides some immediate relief while postponing
the resolution of the real problem. The way Santa rewards good kids, political parties are rewarding
constituents. And the hardworking elves for this gift are none other than taxpayers.

Sources:

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https://www.thehindu.com/business/agri-business/why-do-farmers-need-more-than-loan-
waivers/article25860374.ece

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