India’s The Hindu has published an Op-Ed coauthored by IFPRI researcher, Anjani Kumar.
The article discusses the serious debate on whether providing loans to farmers at a subsidised rate of interest or their waiver would accelerate farmers’ welfare. At the global level, studies indicate that access to formal credit contributes to an increase in agricultural productivity and household income. However, such links have not been well documented in India, where emotional perceptions often dominate the political decisions.
A recent study by the International Food Policy Research Institute reveals that at the national level, 48 percent of agricultural households do not avail a loan from any source. Among the borrowing households, 36 percent take credit from informal sources, especially from moneylenders who charge exorbitant rates of interest in the 25-70 percent range per annum.
The study determined that the net return from farming of formal borrowers is significantly greater than that of informal sector borrowers . Similarly, access to institutional credit is associated with higher per capita monthly consumption expenditures.
Among other problems, a diversion of government money toward debt relief, which is in fact unproductive, will adversely impinge on state finances.