India's Loan Waiver Culture: Is it Bad Economics?

In India, the debt relief programs launched were largely in the form of farm loan waivers for poor farmers. The first case of a national debt relief program in India could be traced back to 1990. The then Finance Minister, Madhu Dandavate, announced an agricultural debt relief scheme to write off overdues or outstanding loans of farmers and artisans of up to Rs 10,000 as on October 02, 1989, by public sector banks and regional rural banks. The announcement of the scheme was made to fulfill a promise made by the National Front government headed by the Prime Minister V P Singh in its election manifesto. Though the scheme involved a fiscal cost of Rs.10,000 crore, the government believed that such a debt relief measure was a positive step that would contribute to better recoveries in the farm sector besides helping to identify wilful defaulters. Further, the government directed the banks to establish a system to maintain a proper credit history of borrowers covered under the scheme while promising to compensate them suitably for writing off the debt...