In the [Opening remarks](RBI_Speeches_20170831_Seminar on Agricultural Debt Waiver – Efficacy and Limitations_Urjit Patel.pdf) at a Seminar on Agricultural Debt Waiver – Efficacy and Limitations, [Dr. Urjit Patel](Urjit%20Patel,%20Dr..md), Governor, Reserve Bank of India, August 31, 2017, Mumbai, eclectically [address](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1045) both sides of the debate. ## Credit Flow to Agriculture 1. In real terms (adjusted for inflation measured by the GDP deflator), the growth of bank credit to agriculture and allied activities accelerated from 2.6% in the 1990s to 15.4 per cent during 2000-01 to 2016-17. 2. Outstanding bank advances to agriculture and allied activities have risen from about 13 per cent of GDP originating in agriculture and allied activities in 2000-01 to around 53% in 2016-17 ([Chart 1](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1045#CH1)). 1. **GVA at Basic Prices** = Output value – Intermediate Consumption, at producer prices 1. Output = total value of everything produced (at producer prices) 2. Intermediate consumption = inputs used up in producing it (seeds, fertilizer, diesel, etc.) 2. **GVA at Factor Cost** = GVA at basic prices – Production Taxes + Production Subsidies 1. Factor cost = value based only on (generated by) what's paid to the factors of production (land, labour, capital, entrepreneur), and no taxes included at all. 3. **GDP at Current Prices** = GVA at Basic Prices + (Product Taxes – Product Subsidies) (inflation is included). 4. But for agriculture specifically, product taxes and subsidies are negligible, we can say agriculture's GDP ≈ its GVA at Basic Prices. 3. 2017 - [Priority Sector Lending (PSL)](Priority%20Sector%20Lending%20(PSL).md) stipulation was 18 per cent of annual net bank credit (ANBC) or credit equivalent amounts of off-balance sheet exposures, whichever is higher, to agriculture. Under this carve-out, 8 per cent is prescribed for small and marginal farmers 4. The share of outstanding advances to agriculture and allied activities in total priority sector advances (PSL) has increased from 32.5% in 2000-01 to 43.2% in 2016-17. 5. Thus, without exaggeration, it is safe to say that financial flows to agriculture have been generous. ## Other Schemes The Government has also undertaken several measures to compensate for the adverse terms of trade and the inert institutional architecture confronting agriculture in order to improve the **profitability of crop production.** ### The Interest Subvention Scheme (ISS) for Farmers 1. It was launched in 2006-07, under which banks and cooperative institutions extend short term crop loans of up to ₹ 3 lakh to farmers at a concessional rate of 7 per cent (9%-2%). 2. Timely repayment is incentivized by an additional subvention of 3 per cent. 3. The scheme also encompasses other benefits, including post-harvest loans for storage in accredited warehouses against Negotiable Warehouse Receipts (NWRs) for upto six months for Kisan Credit Card (KCC) holding small and marginal farmers at a concessional rate of 7 per cent in order to avoid distress sales. 4. During 2017-18, the Central Government provided interest subvention of 5% per annum to all prompt payee farmers for short term crop loans of up to one year. Many farmers will thus have to effectively pay only 4 per cent as interest on loans contracted from these institutions. In case farmers do not repay the crop loans in time, they would still be eligible for interest subvention of 2 per cent. 5. June 14, 2017 - the Government earmarked a sum of ₹ 20,339 crore for this purpose for 2017-18 as against the provision of ₹ 15,000 crore originally made in the Union Budget ([Table 1](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1045#T1)). During 2016-17, the volume of short term crop loan lent stood at ₹ 6,22,685 crore, surpassing the target of ₹ 6,15,000 crore. 6. [April 28, 2022](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12302) - Govt. [approved](RBI_Notification_20220428_Modified%20Interest%20Subvention%20Scheme.pdf) the continuation of the Interest Subvention Scheme (ISS) for the financial year 2021-22. 7. [Aug 17, 2022](PIB_20220817_Modified%20Interest%20Subvention%20Scheme.pdf) - The rate of _Interest subvention_ was _reduced to 1.5_% which was _2_% earlier, with lending rate to farmers remaining unchanged to 7%. The scheme was renamed to Modified Interest Subvention Scheme(MISS) 8. [Nov 23, 2022](https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=12411&Mode=0) - RBI [announced](RBI_Notification_20221123_Modified%20Interest%20Subvention%20Scheme.pdf) the details of Modified Interest Subvention Scheme (MISS) for FY23 and FY24. 9. [May 28, 2025](PIB_20250528_Modified%20Interest%20Subvention%20Scheme.pdf) - Govt. approved the **Modified Interest Subvention Scheme (MISS)** for FY26. ## Issues or farmer/agrarian distress 1. Despite the sizeable volume of subsidised and directed credit flows as well as the various fiscal incentives, Indian agriculture is beset with deep seated distortions that render it vulnerable to high volatility. 2. It has perennially been characterised by: 1. low investment, 2. archaic irrigation practices, 3. monsoon dependence, 4. fragmentation of land holdings and 5. low level of technology, 6. Lack of property rights and low initial net worth of farmers add to the constraints. 3. These issues lead to considerable flux (constant fluctuation) in output and prices is common, imposing large losses on farmers and potentially imprisoning them in a circle of indebtedness with disturbing frequency. 4. <span style="color:#C21E56;">Therefore, in the absence of coordinated and sustained efforts to put in place elements of a virtuous cycle of upliftment, loan waivers have periodically emerged as a quick fix to ease farmers’ distress.</span> ## History of farm loan waivers in India 1. 1990 - The first major nationwide farm loan waiver was undertaken in 1990 and the cost to the national exchequer was around ₹ 10,000 crores, which works out to ₹ 50,557 crores at current prices using the GDP deflator. 2. 2008 - The second major waiver was under the agricultural debt waiver and debt relief scheme (ADWD) of 2008 amounting to ₹ 52,000 crores (0.9 per cent of GDP) or ₹ 81,264 crores at current prices using the GDP deflator. 1. Unlike the 1990 scheme that aimed at providing blanket relief to all farmers up to a certain loan amount, the 2008 scheme waived debt for certain classes of cultivators[1](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1045#F1). 2. 2014 - Andhra Pradesh and Telangana announced farm loan waiver of ₹ 24,000 crores and ₹ 17,000 crores, respectively. 3. 2016 - Beginning with Tamil Nadu in 2016, domino effects have spread in 2017 to several states and the total cost of loan waivers announced amounts to around ₹ 1,30,000 crores (0.8 per cent of GDP) ## Cons of farm loan waivers ### Moral Hazard & Targeting Issues 1. Negative side effects are in the form of: 1. faulty targeting of beneficiaries and resulting discrimination, 2. incentivizing wilful defaulters, and 3. erosion of credit discipline ### Implications for macroeconomic conditions and policies  1. The first impact of any loan waiver is on the balance sheet of lending institutions, be they formal or informal.  1. If the quality of assets deteriorates, the higher provisions crowd out new loans.  2. In the second round, loan waivers impact the state of public finances in the form of higher than budgeted revenue expenditure.  1. This, in turn, has to be financed by additional market borrowings which pushes up interest rates, not just for the States but for the entire economy. A collateral damage is that private borrowers are crowded out of the finite pool of investible resources as the cost of borrowing rises.  2. Also, if budgetary provisions are exceeded, higher spending and widening of the fiscal deficit have, as experience has shown, inflationary consequences, and possible spillovers that could undermine external viability (the twin deficit argument). Also, research points to adverse welfare effects because, ultimately, loan waivers involve a transfer of resources from tax payers to borrowers. Consumption redistribution effects have also been reported. 3. Even if the loan waiver is accommodated within budgetary provisions, it will force cutbacks in other heads of expenditure, and it is usually capital expenditure.  1. It is the money spent on acquisition of assets like land, buildings, machinery, equipment, as also investments in shares, etc., and loans and advances granted by Central Government to State and Union Territory Governments, Government companies, Corporations and other parties, or reduction in the liability of the government.  2. Fall in capital expenditure leads to adverse implications for productivity as asset forming investment, including for the sector itself - e.g., irrigation works, cold storage chains etc., are foregone.  3. If there is not enough capital or infrastructure, and that shortage is what's actually holding things back, then cutting spending on it can raise prices. There will be delays cost time, materials get damaged, and things get more congested and costlier (basically, the "price" of overcrowding a limited system) as capacity gets tighter. 4. Thus it is important to recognise that there are externalities that **spill over beyond the farm sector**. Eventually, other economic agents and other parts of the economy get affected. ### How can these spill overs be minimised? 1. How do we defray the incidence of the burden on tax payers? 1. From a policy perspective, what needs to be done to move away from palliatives in the form of debt relief and into a more fundamental solution that enhances welfare all around? Many elements of this optimal approach are well known - crop insurance, infrastructure, irrigation, technology-enabled productivity improvements, and, opening up the farm economy to market forces and open trade. 2. The Government’s initiative to establish a nation-wide market for agricultural produce, through eNAM, the [Pradhan Mantri Fasal Bima Yojana](https://pmfby.gov.in/), [the Pradhan Mantri Krishi Sinchai Yojana](https://pmksy.gov.in/), [the Paramparagat Krishi Vikas Yojana](https://www.myscheme.gov.in/schemes/pkvy) and the national drive towards financial inclusion for all are important initiatives in this direction. 3. The coming to fruition of these initiatives holds the potential of achieving the mission of doubling farmers’ income over time. We need to ensure that their benefits percolate down to all the intended recipients. ## Related Notes 1. [Urjit Patel, Dr.](Urjit%20Patel,%20Dr..md) ## Further Reading 1. Dr. Duvvuri Subbarao. Jul 12, 2012. Agricultural Credit - Accomplishments and Challenges. (Speech delivered by Dr. Duvvuri Subbarao, Governor, Reserve Bank of India, at the thirty years anniversary celebration of NABARD at Mumbai on July 12, 2012)