#TheHindu #Editorial A subsidy and some questions

The Central government’s decision this week to extend the interest subvention scheme on bank loans given to land-owning farmers at 7 per cent is essentially a welcome move. This is especially so in a context where there is no real clarity on how the current monsoon will turn out to be, running at a deficit of 7 per cent as it does currently. With an additional subvention component of 3 per cent to encourage timely repayment, farmers can effectively avail themselves of up to Rs. 3 lakh at just 4 per cent interest. This scheme, basically offering a sort of agricultural subsidy, has been in place since 2006-07, with the subvention component fluctuating between 1.5 and 3 per cent. With agricultural yield levels and incomes per acre falling or languishing, the need to extend such loans to farmers at low interest levels admittedly exists.

However, what is less clear is the purpose for which many of these loans are being put to. The Reserve Bank of India recently initiated an investigation into the apparent diversion of agricultural loans for unintended purposes. It would appear that farmers’ existing debts to money-lenders, weak supervision of credit utilisation and the categorisation of gold loans as agricultural loans are creating significant grey areas and avenues for loan amounts to be used for purposes other than farming. At certain points of the cropping cycle farmers need large amounts of money and they turn to money-lenders, who charge high rates of interest and often insist on their loans being re-paid first — which forces farmers to divert a part of the subsidised bank loans to repay them. Some farmers put the amounts in fixed deposit accounts to earn higher interest than what they pay. Most farmers do not earn enough to meet their needs, including consumption expenditure, and so these loans serve as an auxiliary source of income. The government needs to recognise the fact that the system of interest subvention will increasingly finance consumption rather than farming, and take one of two steps. It could instruct banks to step up scrutiny on the use the loan is being put to. Or it could rethink the manner in which it wants to subsidise farmers. Implementing direct transfers to bank accounts and investing in research and development to bolster crop yields should serve the same purpose that the low-interest loans currently serve. This step will have the added advantage of potentially improving the plight of farmers. The soft loans are a good idea that needs to be managed and supervised well in order to ensure that the intended outcomes are ensured, and that they help address actual distress in the field.

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