Unintended Consequences- Farmers May Not Repay Bank Loans

Farmers Agitating in India

It took less than 60 days for the ’Law of Unintended Consequences’ to create a ripple effect across India. Even the Governor of the Reserve Bank of India had to warn the States of fiscal slippages that could lead to rise in inflation and affect the National Balance Sheet. Really strong words- but it gives one an idea of how disastrous a single action can be if one is not operating in the right Domain according to the Cynefin Model (© Cognitive Edge).

This is a classic example of how the ‘Law of Unintended Consequences’ operates when simple actions are applied in the Complex Domain (Situations).

The nature of complexity is such that it is highly sensitive to small changes. In order to avoid a situation like the one described above, interventions in a Complex System need to consist of a portfolio of ‘multiple Safe- to- Fail probes’ or experiments. If the results are consistent, then amplify the experiment. If the results are not satisfactory then dampen or stop that action. However it is important to amplify an action only when one understands why it works else it can lead to unintended consequences.

So let’s get into how this unfolded in India. In mid March 2017, the newly elected Chief Minister of one of India’s biggest states (by population and Number of Parliamentary seats) kept his election promise. He waived of the Loans of the Farmers in his state (Rs 36,369/- Crores; USD 5.5 Bn approx). Within weeks farmers in other States were agitating to have their loans waived. State after state faced unexpected farmer unrest. It did not help that there had been bumper harvest a couple of months earlier and the prices for their crops had crashed to un-remunerative levels.

The impact is that waiver of Farmer Loans can actually affect the India Growth Story and even traditional lenders like banks will be wary of putting money in the agriculture sector.

Even as I post this piece, negotiations are on between farmers and the state governments. The Chief Minister of one of the states is using Safe-to-fail probes. After meeting the farmers he announced that his government was actively considering a waiver. Subsequently he announced that only those with loans upto a certain amount were in consideration. A few days later he added that only those who did not own vehicles would be eligible. Seeing the reaction to his announcements he is making adjustments. A good example of the use of ‘probes’.

It is worth studying how this plays out over the next couple of years. Will it affect the India Growth Story?

Note: Image credit: Cathal McNaughton/Reuters