India is a one-party State

Farm loan waivers are an indictment of India’s failed economic development model, of its romancing of informality, subsistence farming and poverty.


Photo: Ramesh Pathania/Mint
Photo: Ramesh Pathania/Mint

On 7 April , the World Health Organization celebrated World Health Day with grim facts on mental depression. More than 300 million are said to be suffering from it. It is probably an undercount. It did not include me. The last fortnight has been depressing. News from faraway shores to proximate ponds left no room for other emotions. Sadder were the signs of leaders from America to India abandoning their convictions. They had allowed their insecurities to get the better of them. Leadership is about taking personal risks for national agenda and not the other way around. 

Let us imagine that India did not have public sector banking at all. As part of the licensing conditions, the private sector banks had to undertake priority sector lending. They have lent to farmers. The farmers are in distress and are unable to repay loans. The government wants to help farmers meet their debt obligations. Since it cannot direct private sector banks to write off the loans, it credits the bank accounts of farmers and lets the banks debit those accounts for the loan amounts, thus discharging the loans. In a sensible world, this is what governments should do, regardless of whether banks are government-owned or privately owned. It is not just a question of optics. It has deep behavioural implications.

Anyone who borrows must not be flippant or encouraged to be so about their obligations to repay. They may run into genuine distress for reasons beyond their control and some of them may have to be bailed out. But cancelling the loans and telling banks that the government would compensate in four or five instalments is not the way to go. It sends a very wrong signal. Policy sanctions legitimize and reinforce unethical behaviour. Just as is the case with tax amnesties, loan waivers lead to expectations of future waivers and loans end up being giveaways, in which case there should be a permanent direct cash transfer from the government to deserving farmers. Or, a functioning farm insurance market. Distorting the lender-borrower relationship is minimum governance and maximum government. We bid goodbye to it in 2014. Or so we thought.

Is there any silver lining to this behavioural damage? Is there any positive economic impact? After the previous United Progressive Alliance (UPA) government announced a loan waiver in end-2007 and carried it out in 2008, a formal study (The Economic Effects Of A Borrower Bailout: Evidence from An Emerging Market, Xavier Giné and Martin Kanz, World Bank Group, November 2014) undertaken to assess its impact documented the damage it had wrought to the loan repayment culture. The waiver had sent a wrong message to prudent and diligent borrowers who repaid on time. Further, the study found that after the loan burden was relieved, farmers did not really invest in productivity or technology, and their yield did not necessarily improve. Their conditions remained the same and they were as vulnerable to the next farming failure as before.  

It is not that farmers do not deserve support. They are supported both at the input and output stages and their incomes are not taxed. Yet a substantial portion of farming in India is unviable. Land sizes are too small to be viable in a sustainable way. After 70 years of independence, around half the workforce is engaged in farming. That is nothing but disguised unemployment because there is no commensurate output. Future bailouts are dead certain. Farm loan waivers are an indictment of India’s failed economic development model, of its romancing of informality, subsistence farming and poverty. 

Comparisons with loan write-offs to industrialists are silly. Banks may take the loans off their books but do not stop pursuing them. Most of the industrial loans are collateralized and further, such write-offs are commercial decisions taken by banks and not thrust on them by a government which is also the shareholder. Farm loan waivers are one more reason, if it were needed, that public sector banking has vastly outlived its usefulness, on balance.

The size of the recent Uttar Pradesh (UP) farm-loan waiver is not small. If the UPA farm loan waiver amounted to $16-17 billion at that time, this loan waiver of Rs36,700 crore is equivalent to $5.65 billion at current exchange rates. It is 34% of the UPA loan waiver. Further, there are copycat demands. Farmers from Tamil Nadu have been camping in Delhi demanding loan waivers. Maharashtra is studying the decision by the UP government for replication. The final size of the loan waivers may exceed what the UPA government did. The overall general government fiscal balance did not improve in India in the last few years despite apparent improvement in the finances of the Union government because the states had compensated with their profligacy. It is set to get worse. So much for Congress-mukt Bharat. In a sense, the Congress party has succeeded more than it thinks. It has succeeded in making the Bharatiya Janata Party (BJP) a mirror image of itself. Except for symbolic cultural nationalism, the BJP has adopted the Congress policy plank of short-term appeasement. 

After the appointment of Yogi Adityanath as the chief minister of UP, Pratap Bhanu Mehta wrote that Prime Minister Narendra Modi had chosen to defeat India in the hour of his political triumph. He was wrong. The Prime Minister had defeated himself when he pledged a farm-loan waiver during the poll campaign. 

V. Anantha Nageswaran is the co-author of Economics Of Derivatives and Can India Grow?

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