This is not a case of weakening credit culture or of moral hazard. It is the outcome of the simple fact that: while the government is willing to provide for 'acts of God', it is not willing to do so for an 'act of State' or force majeure. If anything, the State is in denial.
Farm loan waiver is a price for demonetisation
Harish Damodaran convincingly proves that demonetisation is the cause for recent farm stress. He argues that the lack of liquidity in cash-intensive agricultural markets left the farm produces with no buyers. This resulted in drastic fall in prices. He points out that the price crash is not in one or two crops as would happen usually, it is now across a wide variety of crops.
Damodaran also points out the negatives of targeting consumer price inflation that has high weightage to food prices. This structurally keeps farm prices low.
In another column, Pronab Sen says that farm distress is usually confined to few districts and that too during drought years. The fact that the current farm distress is in a year with good monsoon and across wide geographic areas makes this situation unique. He too attributes the cause to demonetisation.
For these reasons, Pronab Sen argues that the current context of farm distress is different from earlier contexts and merits a loan waiver to compensate for losses due to demonetisation. He writes
Pronab Sen further argues that if the state governments don't waive loans, the economic situation is going to be even worse. The farm loans are insured by Agriculture Insurance Company of India (AIC). AIC doesn't have enough capital to finance the current farm loans. So, in case of default, the central government has to capitalise AIC such that it can fund banks. It's just that the burden shifts from states to central government in this case. Further, in case of default, the additional negative is that farmers lose their collaterals in case of default, affecting their ability for future investments.
Pronab Sen also makes an important point that we are trying to shift farmers to commercial crops without ensuring necessary support structures, which makes farmers vulnerable to more risks.
To put a number to the losses due to demonetisation, Jaggi points out that the losses are easily triple that of CMIE's 1.2 lakh figure. He expects it to be easily 3.5 - 4 lakh crore. The denial of demonetisation led catastrophe and silence of early supporters like Prof. Bhagwati, Deheija is stunning. Meanwhile, we are using 101 economics to make farmers and informal sector to bear the brunt of demonetisation without considering the specifics of this context.