New Delhi: Struggling to turn its Union Budget largesse into electoral gains and in a nod to a demand by Congress Party’s heir apparent Rahul Gandhi, the government expanded its populist farm debt waiver programme by nearly 20% to Rs71,680 crore, adding three million farmers to an estimated 40 million who were to benefit.
The move came as revised inflation data, as measured by the wholesale price index, topped the psychological mark of 8% on 28 March—at 8.02%, it was sharply higher than the provisional 6.68%—and on the eve of what many see as another likely electoral setback for the ruling United Progressive Alliance in Karnataka where votes will be counted on Sunday.
Meanwhile, the ruling alliance faces several other key state elections this year ahead of what will be closely contested national elections due within a year.
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But the expanded package, to be implemented by 30 June, spells additional fiscal burden, that too at a time when global crude prices are soaring and hefty salary increases are due for government employees.
Even if one adds up only the Union government’s additional liabilities on account of the new farm package and the Pay Commission recommendations, as Pronab Sen, chief statistician of India, does, the Centre’s fiscal deficit, or its gross borrowings, is likely to rise to over 3.5% of gross domestic product (GDP).
“The previous targeted scheme would have badly boomeranged on the (Congress) party,” Sen said, “So this extension is a good thing and simpler to execute too. However, this does put the fisc under severe stress, making it a tough job for the incumbent government next year.”
Following a meeting of the Union cabinet, headed by Prime Minister Manmohan Singh, finance minister P. Chidambaram said the scheme had been modified to waive Rs20,000, or 25%, whichever is higher, of the outstanding debt of farmers with landholdings exceeding two hectares or five acres in 237 identified districts.
Chidambaram said the government had found that the average short-term crop loan taken by these farmers amounted to Rs19,908 while the average investment loan was Rs13,324. So, he said, farmers with landholdings exceeding two hectares would be able to avail of a full debt waiver.
The package would benefit allied agricultural activities such as poultry, dairy andfisheries, as well as activities such as deepening of wells, sinking new wells, purchase of tractors, cattle and water pump sets.
“Farmers will be able to borrow from banks again and invest in production, which can only ease the inflationary pressure,” said M. Veerappa Moily, chairman of the Congress party’s media cell.
Mohammad Salim, deputy leader of the Communist Party of India (Marxist), the largest constituent of the four-party Left Front that lends a critical outside support to the UPA, said the expansion was logical but inadequate.
“Debt waiver for small and marginal farmers and debt relief for the other farmers are welcome but, these do not cover the majority of farmers who have borrowed through private moneylenders,” he said.
While the government has initially maintained the package wasn’t driven by electoral calculations, most observers see it as policy being driven by political expediency.
“The expansion of the package signals a continuity of the strategy to credit Rahul Gandhi with measures benefiting the aam aadmi (common man), first by extending the National Rural Employment Guarantee Scheme at his behest and now the biggest farm debt relief package in the country’s history,” said Bidyut Chakrabarty, a political analyst at the University of Delhi’s department of political science.
Chakrabarty, however, discounted political gains for the ruling coalition on this count because of the greater impact of the runaway rise in prices of essential commodities.
“Wooing well-off farmers, in regions such as western Uttar Pradesh where (UP chief minister) Mayawati’s Bahujan Samaj Party has also made inroads, makes sense but it can hardly erase the negative countrywide impact of increasing inflation,” he added.
On 13 March, Gandhi had said in the Lok Sabha that he had “discussed the scheme with several experts... The current ceiling of two hectares for eligible farmers does not account for land productivity and excludes deserving farmers in poorly irrigated areas. I refer specifically to dry-land areas like Vidarbha.”
While the Centre accommodated this suggestion, it didn’t agree to Gandhi’s other demand that the single cut-off date of 31 March 2007 for loans disbursed should be reconsidered since, owing to the different cropping cycles, a large number of farmers had taken loans after the cut-off date.
Yashwant Sinha, a former finance minister and deputy leader of the Bharatiya Janata Party in the Rajya Sabha, said the figure put out by the Centre was suspect. “The government is yet to explain just how it has arrived at this figure of Rs71,680 crore, just as it had not explained the basis for the original estimate of Rs60,000 crore,” he said, “The government itself doesn’t appear serious about the deadline of 30 June” to implement it.
Indeed, the Reserve Bank of India sent out an advisory Friday asking all scheduled commercial banks and local area banks to expedite the process and comply with the 30 June deadline.
Chidambaram also noted the guidelines would ensure speedy implementation. Debt-ridden farmers would not be required to give in any applications and each branch of the banks concerned would be required to put up a list of small, marginal and other farmers who have outstanding dues on farm loans taken by them.
The beneficiaries would just need to go the bank and seek a certificate of waiver. Following the waiver, these farmers would be eligible for fresh loans.
While commercial banks (public sector, private and foreign), local area banks, cooperatives and regional rural banks would waive unpaid loans of farmers on their books by 30 June, farmers located in the 237 districts that fall under the areas earmarked for attention under schemes such as Prime Minister’s Special Relief Package would qualify for the one-time settlement.
“You are basically creating incentives for default,” D.K. Joshi, principal economist of credit rating agency Crisil Ltd. “There is a serious moral hazard issue.”
“We have been concerned about the rising fiscal deficit for some time now,” said Tushar Poddar, economist with Goldman Sachs, “After accounting for the off-budget liabilities of the government, we expect the fiscal deficit to increase by over 7% of GDP in the current fiscal, up from 5.7% last year.” Poddar’s estimate includes the debt relief package, the hike in wages recommended by the pay commission and various duty cuts to contain inflation.
(Paromita Shastri and Sanjiv Shankaran contributed to this story.)