Supreme Court Upholds Loan Waiver Scheme for Small Farmers: State of Tamil Nadu vs. National South Indian River Interlinking Agriculturist Association (23 November 2021)

Introduction

Date of the Judgment: 23 November 2021
Citation: 2021 INSC 748
Judges: Dr. Dhananjaya Y Chandrachud, J. and A.S. Bopanna, J. (authored by Dr. Dhananjaya Y Chandrachud, J.)

Can a government limit loan waivers to only small and marginal farmers, or must it extend such benefits to all farmers regardless of landholding size? The Supreme Court of India recently addressed this crucial question in a case concerning a loan waiver scheme implemented by the State of Tamil Nadu. The core issue was whether excluding farmers with larger landholdings from the scheme violated the principle of equality enshrined in Article 14 of the Constitution. This judgment clarifies the extent to which the government can make distinctions in welfare schemes and the limits of judicial review in such matters.

Case Background

The State of Tamil Nadu introduced a loan waiver scheme through G.O Ms. No. 50, dated 13 May 2016, aimed at providing relief to small and marginal farmers. This scheme waived outstanding crop loans, medium-term (agriculture) loans, and long-term (farm sector) loans. The government defined ‘small farmers’ as those holding between 2.5 and 5 acres of land, and ‘marginal farmers’ as those holding up to 2.5 acres. The classification was based on landholding records at the time of loan sanction. The National South Indian River Interlinking Agriculturist Association challenged the scheme, arguing that it unfairly excluded farmers with larger landholdings and violated Article 14 of the Constitution.

The High Court of Judicature at Madras agreed with the association, holding that the exclusion was arbitrary and discriminatory. It directed the state to extend the loan waiver to all farmers, irrespective of landholding size.

Timeline

Course of Proceedings

The National South Indian River Interlinking Agriculturist Association filed a writ petition before the High Court of Judicature at Madras, challenging the loan waiver scheme. The High Court ruled in favor of the association, stating that the exclusion of farmers with landholdings exceeding 5 acres was discriminatory and violated Article 14 of the Constitution. The High Court directed the state to extend the loan waiver to all farmers. The State of Tamil Nadu appealed to the Supreme Court, which stayed the High Court’s judgment. During the pendency of the proceedings, the State of Tamil Nadu issued GO (MS) 15 and 16, waiving crop loans of Rs. 12,110.74 crore for 16,43,346 farmers from cooperative banks.

Legal Framework

The primary legal framework in this case is Article 14 of the Constitution of India, which guarantees equality before the law and equal protection of the laws. The Supreme Court also considered the Directive Principles of State Policy, which guide the government in formulating welfare schemes. The Court noted that while the judiciary can review government policies, it must show deference to matters of economic policy. The Court also considered the principle of reasonable classification, which allows the state to classify people for the purpose of legislation if the classification is based on an intelligible differentia and has a rational nexus to the object sought to be achieved by the statute.

The court also discussed the concept of under-inclusiveness and over-inclusiveness in classification, referring to the case of State of Gujarat v. Ambica Mills [ (1974) 4 SCC 656].

Arguments

Arguments by the Appellants (State of Tamil Nadu):

• The government can formulate policies based on its financial capacity.
• The scheme was formulated after studying the financial capacity of the State.
• Small and marginal farmers are the most affected class and require specific assistance.
• The underlying policy is to maximize the number of beneficiaries with efficient use of funds.
• Even if farmers with larger landholdings suffered losses, it is a fiscal policy decision of the State to only extend the scheme to small and marginal farmers.

Arguments by the Respondent (National South Indian River Interlinking Agriculturist Association):

• Farmers with larger landholdings contribute more to the GDP and food security.
• The court can interfere with a policy decision if it is arbitrary.
• The State failed to prove that small and marginal farmers constitute a class in themselves.
• Farmers holding larger landholdings are better contributors and have suffered greater losses.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the court can exercise its powers of judicial review since the scheme is a policy decision of the government.
2. Whether the extension of the scheme only to ‘small farmers’ and ‘marginal farmers’ is arbitrary and violative of Article 14 of the Indian Constitution.
3. Whether the scheme is under-inclusive and over-inclusive.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

Judgment

The Supreme Court allowed the appeal and set aside the judgment of the Madras High Court. The Court held that the loan waiver scheme, which was limited to small and marginal farmers, was not discriminatory and did not violate Article 14 of the Constitution. The Court reasoned that small and marginal farmers constitute a distinct class due to their limited resources and greater vulnerability to climate change and market fluctuations. The Court also emphasized that the scheme was a welfare measure aimed at uplifting the economically weaker sections of society. The Court held that the classification based on landholding was not arbitrary and had a rational nexus to the objective of the scheme.

How each authority was viewed by the Court?

• Union of India v. Dinesh Engineering Corporation [(2001) 8 SCC 491]* and Om Kumar v. Union of India [(2002) 2 SCC 386]*: These cases were used to establish the court’s power to review policies for constitutional compliance.
• R.K. Garg v. Union of India [(1981) 4 SCC 675]*: This case was used to emphasize judicial deference in economic matters.
• BALCO Employees Union v. Union of India [(2002) 2 SCC 333]*: This case was cited to support the view that the wisdom of economic policies is not generally subject to judicial review.
• Subramaniam Balaji v. State of TN [(2013) 9 SCC 659]*: This case was used to support the view that welfare schemes do not violate Article 14 as they provide benefits, not burdens.
• State of W.B v. Anwar Ali Sarkar [1952 SCR 284]*: This case was used for the twin tests of reasonable classification.
• State of Gujarat v. Ambica Mills [(1974) 4 SCC 656]*: This case was used for the definitions of under-inclusiveness and over-inclusiveness.
• Missouri, K&T Rly v. May [194 US 267, 269]*: This case was used to support the view that courts should exercise self-restraint in reviewing under-inclusive classifications.
• E.P. Royappa v. State of Tamil Nadu [(1974) 4 SCC 3]*: This case was used to establish that arbitrariness of State action is sufficient to constitute a violation of Article 14.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the need to protect the interests of small and marginal farmers, who are particularly vulnerable to economic distress. The court emphasized the following points:

• Economic Vulnerability: Small and marginal farmers are more susceptible to financial hardships due to their limited resources, lack of technology, and greater dependence on external factors like climate and market conditions.
• Social Justice: The loan waiver scheme was seen as a measure to achieve social justice by uplifting the economically weaker sections of society.
• Substantive Equality: The court underscored the importance of substantive equality, which requires affirmative action to address existing inequalities.
• Rational Classification: The classification based on landholding was deemed reasonable as it directly addressed the needs of the most vulnerable farmers.

“The small and marginal farmers belong to the economically weaker section of society. Therefore, the loan waiver scheme in effect targets the economically weaker section of the rural population.”

“Due to the distinct degree of harm suffered by the small and marginal farmers as compared to other farmers, it is justifiable that the benefit of the scheme is only provided to a specified class as small and marginal farmers constitute a class in themselves.”

“The scheme is introduced with an endeavor to bring substantive equality in society by using affirmative action to uplift the socially and economically weaker sections.”

Key Takeaways

• Government welfare schemes can prioritize the most vulnerable sections of society.
• Classification based on economic vulnerability is permissible under Article 14.
• Courts will show deference to government policies, especially in economic matters.
• The principle of substantive equality allows for affirmative action to address existing inequalities.
• The judgment reinforces the idea that the state can target specific groups for welfare benefits, provided there is a rational basis for doing so.

Directions

The Supreme Court set aside the judgment of the Madras High Court, thereby upholding the validity of the loan waiver scheme limited to small and marginal farmers. No further directions were given.

Development of Law

The ratio decidendi of this case is that a government can classify beneficiaries for welfare schemes based on economic vulnerability, provided there is a rational nexus between the classification and the scheme’s objective. This case clarifies that the principle of substantive equality allows for affirmative action to uplift the weaker sections of society. It also reinforces the idea that while the judiciary can review government policies, it must show deference to matters of economic policy and the state’s financial capacity.

Conclusion

The Supreme Court’s judgment in State of Tamil Nadu vs. National South Indian River Interlinking Agriculturist Association upholds the State’s decision to limit loan waivers to small and marginal farmers. The Court emphasized that this classification is not arbitrary but is based on the economic vulnerability of these farmers and the need for affirmative action to achieve substantive equality. The judgment provides clarity on the extent to which the government can make distinctions in welfare schemes and the limits of judicial review in such matters.