Tamil Nadu Chief Minister Edappadi K Palaniswami informed the state assembly last week that his government would forgo rupee 12,110 crore under the agricultural loan granted to 1.64 million farmers by the cooperative banks. The loan exemption comes before an assembly election that will take place in the summer. Another important background is that Palaniswami is a strong supporter of central farm laws to reform agriculture and also the leader of a political coalition in which the BJP is a junior partner. State BJP leaders support their ally’s loan exemption program.

These developments show to what extent a political consensus is being built in an inconsistent manner to bring about agricultural reforms. A compelling argument for central farm laws comes from the distortions that have occurred as a result of the existing farm subsidy regime. Collateral damage from this regime includes subsiding groundwater and deteriorating air quality in northern India. Agricultural reform does not mean the end of support to farmers. This requires a change in the nature of support from indirect grants to more direct grants like Income Assistance that some states and the Center provide through wire transfers to bank accounts.

One of the nefarious distortions comes from government subsidies in the form of a loan waiver, like the one promised by TN. Between April 2014 and September 2019, RBI said 10 states had waived agricultural loans totaling Rs 2.4 lakh crore. This is huge, larger than the two national loan exemptions of 1990 and 2008 combined, even after accounting for inflation. Loans that are canceled are repaid by the states, but over a period of time. It hurts the banking system. This spoils the culture of repayment and also affects future credit outflows as banks start to look for safer options.

Political parties cannot have it one way in the Center and another in the United States. Instead of undermining the case for reforms in this way, indirect subsidies should be phased out, which is easy now because the mechanism for direct bank transfers is in place. The TN loan exemption amounts to around Rs 73,706 per farmer, more than 12 times the Center’s annual income assistance of Rs 6,000. If this sum had come through a direct transfer, this would have made it possible to support market-oriented reforms, which AIADMK and BJP support. Instead, we have another example of an indirect subsidy that will cause collateral damage.


This article was published as an editorial opinion in the print edition of The Times of India.


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