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Is Loan Waiver a Panacea for Rural Distress?

On the eve of elections in India, farm loan waiver became one of the major election promises. According to some estimates, as a result of farm loan waivers, there is a likelihood that during fiscal 2018-2019, India’s fiscal deficit may widen to $16.17 billion. Furthermore, if all the states in India were to waive 50% of their farm debt, it would cost 1% of India’s GDP (in 2016-17 prices). The brief argues that the farm loan waivers are not the solution to farm crisis. During the year following loan waivers, small farmers lose out on three counts: lower access to formal loan, falling agricultural revenue because of higher informal loan cost, and a falling agricultural productivity. This has a wider implication on income distribution. Instead, to boost an increase in farmers’ income, the brief proposes interventions in the following areas: 1) building cold storage and warehouses, 2) linking domestic market with international markets, 3) a number of other supply-side interventions including infrastructural investment, and  4) improving financial literacy.

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