When a government is in election mode, the sky is usually the limit for its populism. This is reflected in the expansion of the farm loan waiver scheme, announced originally in the 2008-09 Budget speech, to cover more farmers, though at a huge cost of Rs 71,600 crore (Rs 716 billion) for the exchequer, instead of Rs 60,000 crore (Rs 600 billion) envisaged earlier.

This largesse will now be available also to those engaged in agriculture's allied activities like livestock rearing, as also to those who had availed themselves of investment credit for purposes like deepening wells and purchasing tractors.

Significantly, an attempt has been made to appease the large farmers (owning above two hectares of land) by raising the minimum benefit amount to at least Rs 20,000, instead of merely 25 per cent of the debt amount, under the loan settlement arrangement that requires repaying three-fourths of the dues.

This has, avowedly, been done to bail the farmers out of the debt trap.

The truth, however, is that this objective is unlikely to be served for several reasons. For one, the debt relief covers only the farmers who have taken credit from banks, leaving out those who are indebted to moneylenders and are, therefore, in real distress.

Most of the cases of suicides in recent years involved such farmers. Going by the reckoning of the Rangarajan committee, and endorsed by field surveys, only about 27 per cent of farmers are covered by institutional credit.

Thus the bulk of the farmers would get virtually nothing from this waiver.

Besides, the guidelines for debt relief have been relaxed only for the large farmers, owning more than two hectares of land, in dry land tracts, and not for the small and marginal farmers, who actually deserved a better deal, though, while doing so, the government has itself conceded that most farmers in arid districts have holdings larger than two hectares.

Yet, the threshold of the farm size for small and marginal farmers, which entitles them for full debt write-off, has not been raised from the present two hectares.

Thus, contrary to the official claims, the number of farmers who may actually get their loans written off would be very small. The real beneficiaries of this profligacy may, indeed, be the banks whose bad loans would get cleared. The total gains to the banks, on full implementation of the scheme, including loan settlement, are expected to be worth over Rs 92,000 crore (Rs 920 billion).

This apart, the most disquieting aspect of this ill-advised move is its potential long-term adverse fallout for the agricultural credit sector as a whole. One of its aftermaths has already surfaced in the form of an abnormal rise in the default rate of bank loan repayments.

The revised and enlarged scheme would further encourage the borrowers not to repay their debts to the banks, turning even the honest bank customers into defaulters.

Besides, for the same reason, the banking institutions may turn wary of lending to farmers, thus, adversely hitting the overall flow of institutional credit to the farm sector, boding ill for farmers as well as farming.

• FM on whys and hows of farm loan waiver