The Politics of Band-Aid Policies : Loan Waivers

What is a band-aid policy?

A band-aid policy is defined as a “hasty solution that covers up the symptoms but does little or nothing to mitigate the underlying problem” or a “quick-fix” in general terms. One the reasons why agriculture is not profitable in India is that it is overwhelmingly full of band-aid solutions that have more to do with politics rather than economics. Take the example of loan waivers – loan waivers have been used as a quick fix to solve any and all kinds of agrarian crises. This started in 1990, as a set of agricultural debt relief schemes, which essentially translated into waiving off farm loans worth thousands of crores of rupees by cooperatives and banks. Over the next decade, the state governments started doing the same thing despite criticism from several economists. Today, we still have agrarian crises and widespread distress, farmers are still committing suicides, but political parties continue to tout “loan waivers” as the all-in-one solution in their campaigns.


Loan waivers: A glaring band-aid policy


Loan waivers refer to the cancellation of recovery or refraining from claiming the dues by the banks. In other words, banks will give up on these loans and no recovery will ever be made.  This is done to provide relief to the farmers due to situations such as poor monsoons, floods, crop failures etc., which are beyond the control of the farmers and hence it is almost impossible for them to pay off the money they have borrowed. The state thus takes over the liability to repay the banks.


Loan waivers seem logical when there is a drop in farmers’ incomes while the input costs are constantly rising. Agriculture is heavily credit-dependent in our country and thus weather disasters coupled with abnormal market fluctuations makes it unimaginable for the farmers to repay the loans. If they are forced to do so, they would be trapped in the cycle of rising interests and this would curb investment in the next season and increase the agrarian distress which ultimately results in farmer suicides. But the fact is, loan waivers are bad policy. Every time we tried to implement it, it resulted in a decline in recovery rates and larger and larger defaults.


The reason why loan waivers haven’t worked is that it is a band-aid solution, offering only a quick-fix, rather than solving the root cause of the problem. Moreover, it doesn’t help the farmers that are most distressed. According to NABARD, only about 30% of agricultural households borrow from institutional sources such as banks. So, loan waivers do not help the vast majority of farmers (the other 70%). The only farmers who benefit from loan waivers are the big farmers.


Loan waivers set a bad precedent by rewarding farmers who default and weaken the banking system. This disturbs the credit discipline in the country which takes decades to build. Just because farmers don’t pay for the loans they take, doesn’t mean nobody pays. The government pays from the public expenditure fund i.e. the hard-earned money of the taxpayers. The same could have been used for structural investments such as irrigation facilities, storage and processing facilities, building supply-chains, credit penetration, research and development etc. On the other hand, farmers have, more often than not, tended to misuse the loan amount on social occasions such as weddings, rather than on agriculture. CAG audits over the years have revealed several fake claims, ineligible beneficiaries, exclusion of deserving claims and several other errors.

Need for structural reforms


There is no dearth of issues in agriculture. Loan-waivers at best are a band-aid solution and not a cure. There are fundamental problems that need to be solved otherwise we are in the same situation year after year. We must think about the long term welfare of the farmers. If loan-waivers are happening, they must come with accountability. There are several other ways to address the agrarian distress such as Land consolidation - a policy such as granting permission to lease land without alienating ownership would have started addressing the core issue. This would incentivise entrepreneurs and attract investments. Leasing would lead to agglomerating lands, thereby increasing output per acre through economies of scale; reducing the cost of cultivation through access to cheaper sources of water, fertilizers and fuel; raising of MSP as recommended by the Swaminathan committee; alternative opportunities such as horticulture, fisheries, livestock farming; a systematic risk reduction plan such as insurance coverage (PM Fasal Bima yojana is a great example), modern and innovative agricultural practices through indigenous knowledge as well as agri-tech. However, the primary reform is to develop agricultural infrastructure. We need cold storages, warehouses, processing facilities as well as agricultural markets. Consider the case of perishable produce. Fruits and vegetables are among the most perishable commodities. Over the years, innumerable farmers had to face the brunt of post-harvest losses because of lack of proper storage facilities. A way to reduce post-harvest losses is to create secondary demand through value addition such as fruit juices, pickles, veggie bars etc. This has huge export potential.


We must understand the need for structural reforms and not band-aid policies – 58% of the total population is engaged in agriculture and contributes to only 18% of the GDP. This sector is especially vulnerable to climate change and needs investment and basic infrastructure to diversify into integrated agriculture. We need a multi-pronged long term solution rather than short-term fixes. While the government has been taking several steps to address the dire situation, there is an urgent need to accelerate them. Pt. Jawaharlal Nehru said in 1947, “Everything can wait, but not agriculture.” However, we did the exact opposite. The sector needs an urgent transformation.

What do you think? Let us know in the comments. 

Note: Images are for representative purposes only. The authors do not own them.


  1. I think loan waiver scheme is necessary for farmers, besides this government has to built lots of cold storage, food processing infrastructure and effective logistics facilities. Moreover PM fasal insurance scheme must cover all the crops.


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