Critical Analysis of Farmer Loan Waivers

India is said to be an agriculturally based economy, and agriculture sector has a significant contribution to the GDP and in the employment of the workforce. The sector which involves the rural area of the country deserves a quick redressal in its distress. For which it needs a strengthened formal institution to ensure a proper credit source for the production activities. But this redressal has taken the country to the verge of nurturing the idea of waiver to them, which can be said to be a quick humanitarian relief and a good political move but when seen from the economic point of view it weakens the credit culture of the country.  Various states have been announcing the loan waivers for farmers one after the other. This article explains what actually is loan waiver and history of farm loan waiver in India. Questions like how farmers are benefited from it? How can it be an unviable option for redressal? The author makes an effort to address these questions in the best possible manner.

“There are no miracles in agriculture production.”

                                                                                                            – Norman Borlaug


India, since many years, was said to be an agriculturally based economy. Even in current times, agriculture plays a significant role for the contribution in the GDP of the country. Agriculture comes on number third, Services being first with 53.66% and industrial being second with 29.02%, in contribution in the GDP with 17.32%. Even though this sector comes at number three in the contribution to the GDP, but in terms of involving the workforce it employs about 49% of the workforce[1].  This shows that agriculture plays a significant role in India.

The most important problem faced by the workforce of farm sector is that they have to depend on the monsoons for irrigation. Almost half of the agricultural land is not irrigated in India and because of this, majority of farmers have to be dependent on monsoon for their agricultural output. It is entirely uncertain if their output will increase, decrease or everything will be destroyed. Farmers take loan for generating output and because of this dependency and unnatural events they are not able to repay the loan or sometimes gets engulfed in debt trap which results in serious consequences as given in 2015 Government Report, which states that over 8000 farmers and about 4500 agricultural workers committed suicide because of crop failure and incompetence to repay the loan amount.

One of the reasons for this is irrigation, in which the supply of water is controlled according to the agricultural produce by the farmer. This help in the easy availability of water. But in our country only about 50% of the land is irrigated which compels farmer to be dependent on uncertain water availability i.e. monsoon and subsequently this dependency results in heavy burden of repaying loan.

There has been no data release since last two years about the suicides committed by the farmers but there have been several agitations by the farmers on this issue and they demand loan waiver.[2]

Farmer loan waiver 

A loan waiver is the waiving of the real or potential liability of the person or party who has taken out a loan through the voluntary action of the person or party who has made the loan.[3] Farmers take loan from bank for the production purpose or for buying the equipment necessary for the production. When there is a good harvest situation comes in favour of both lender and the receiver hat is bank and farmer. But when there is crop failure, because of natural calamity, which makes farmer incapable to repay the loan. In such situation of distress, the centre or the state take responsibility of the loan taken farmer and pay it to bank on their behalf as a relief and give farmer waiver from the loan this is called as farm loan waiver. There are two types of farm loan waivers: 

  1. Complete waiver- in this whole amount is paid by the government
  2. Partial waiver- in this only a certain part is paid back by the government. 

History of Farm loan waiver in India:

The history of giving farm loan comes from the medieval age, at the time of Muhammad-bin-Tughluq (1325-51) so as give relief to the distressed farmers. Later  in the subsequent times this loans policy was taken back by Firoz Shah Tughluq. 

Since then for so many years there was not policy to ameliorate the distress of farmers. Then after the independence of our country in 1990 by the VP Singh led government, the first nationwide farm loan waiver was implemented. It involved the outgo of Rs 10,000 crore. Then in 2008, by the UPA led government, the Agricultural Debt Waiver and Debt Relief Scheme were implemented that involved the outgo of Rs 71,680 crore. Since then various states have been announcing the loan waivers for the farmers one after the other. 

Impact of farm loan waiver:

Since 2014-2015, many State governments have been announcing farm loan waiver in the country.  When critically analysing the situation, it shows that this was done for a variety of reasons such as for relieving distressed farmer who were struggling with lower income group in wake of droughts and demonetization stating it to be the condition of liquidity crunch in the market. Also, the crucial reason considered at that time was the timing election. 

There are some issues with the farm loan waivers as it is shown by the studies that if the loan waiver is provided it leads to wilful default of loans and damage to the credit culture of the country. For example: there is a farmer A who took a loan of rupees 5 lakh, and in 3-4 years he repaid the amount to bank. There is another person B who also took the loan of same amount but didn’t repay the money on the other hand we waited to 3-4 year for the elections to come in which the government announced for a loan waiver a he didn’t have to pay the amount. So, in the situation like this the honest payer of money will also tend to do the same in future which will increase the number of wilful defaulters in the list. This will result in damage to credit culture and also this will subsequently result in manifold increase of NPAs (non-performing assets) in the commercial banks. This can also result in free rider problem which means that farmers in the hope of getting a waiver may take loan even if there is no need this will result in the situation where those small/ marginal famers who are genuinely in need of the loan will be denied of the same. Also, the lending institutions i.e. the banking industry will become reluctant to give the loans to the farmers as after bearing the losses by the implementation of debt waiver schemes. This problem will create wave of more problems as this will compel the farmers to have the dependency on informal sector in which there are subsequent chances of being engulfed in a debt trap.

According to the World Bank and UN experts, debt waiver is not a good way of supporting farmers. Experts said that a “populist” measure such as “blanket debt forgiveness” would prove no good. They say that the government should instead find the root cause that contributes to this debt pile up by the farmers that subsequently results in the distress economy and for the government. Therefore, it is considered to be an unviable option.[4]


Though the farm loan waiver schemes were introduced to give relief to the distressed farmers, its implementation has not showed the required objective as the waiver has increased the wilful defaulters in the list. The credit culture of the economy has been significantly affected by it. This policy has been disregarded because of various reasons first being the reputational consequences as the repayment discipline of the farmers have been adversely affected by this. Second is that the reason of the waiver was to help farmer cope up with the pressure of repayment and help him increase the productivity of his land but this has not been seen. And this waiver scheme has also led to increase in the dependency of farmers on informal sector and the access to the formal institution has declined thereof as the baking sector after bearing the losses does not proving credit that easily. But it can’t be ignored that it is natural for any sector or a firm to bear a loss/debt which is inevitable or has been occurred of the unseen consequences. There are firms who avail the benefit of waiver in the name of one-time settlement. As the firm demand, even farmers can demand for the reduction in their liability to pay. But these sectors do get the infusion of credit in the sector without any hindrances but in the case of farm sector there is shrinkage in the access to the credit from the formal sources. From this point of view the demand of farmers for their loan waiver can be justified.

We know that agriculture comprises 49% of the workforce in the country which shows that there are surplus workers in this sector, if the engagement of these surplus workers can be taken away to other productive sector farming can become more profitable as the bread earning sources will be increased and this will subsequently help in the economy and will  become sustainable for all the people.

In the current situation, farm loan waiver can’t said to be a permanent solution to the problem of farm sector as this have a lot of drawbacks that at last does not help in any productive result rather, in the end give them choice, other than being dependent on money lender  ‘sahookars’ or to any informal source. It does not make them free from any problem, that would have been the purpose of loan waiver to resolve, like decreasing farm income, being engulfed in debt trap, or crop failure. The sum foregone to repay loans could have greater returns if it is spent in agricultural research and development, industries, irrigation or also by increasing the penetration of institutional finance. However, regular loan delays, which are frequently politically motivated, threaten the rural credit distribution system. This results in a stagnation in the flow of agricultural credit and a perpetual propensity of non-repayment of loans by borrowers. Ample evidence and research confirm that loan waiver has not increased agricultural productivity and in fact resulted in an increase in moral hazard among the eligible households. The CAG report following the 2008 loan waiver clearly brought out rampant corruption and exclusion and inclusion errors in identification of beneficiaries. 

Apart from benefiting only institutional borrowers, loan waivers would be a heavy drain on the financial resources of both the States and the Centre which may adversely affect public investments in agriculture and irrigation and dissuade private investments. Credit, be it from formal or informal sources, plays an indispensable role in the lives of agricultural households. Efforts should be made towards financial inclusion of agricultural households, particularly of marginal and small farmers. 

Rather than using an economically unreasonable, inefficient and socially inequitable tool such as the loan waiver, the Government can create alternative methods for resolving farm sector problems.


  1. What is farmer loan waiver?

            When the centre or the state take responsibility of the loan taken farmer and pay it to bank on their behalf as a relief and give farmer waiver from the loan this is called as farm loan waiver.

  • When was it first introduced?

       The first nation-wide farm loan waiver was implemented in 1990 by Janata Party government led by then Prime Minister V.P. Singh and cost the government Rs 10,000 crores.

  • What is the difference between loan waiver and write off?

The major difference between “Write off” & “Waive off” Loan is that Loan Waive-off is something where the loan-taker is released from the burden of paying back the loan amount, while in the case of Loan Write-off; the financial institute still hopes to recover the loan amount from the person who not repaid it back

  • What are the sources of taking loan for the farmer? 

      Formal source that is commercial banks and informal source like money lender and   sahookars.

  • Does farm loan waiver affect NBFCs?

      Loan waivers affect only bank loans, leaving aside the non-banking finance companies (NBFCs)






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