The United Progressive Alliance’s (UPA) proposed mega relief package to the agricultural sector, including a waiver in farm loans that will likely be announced in the coming Union Budget, should be seen in the context of the general election that is just a year away.
As per current estimates, the agricultural sector is projected to register a mere 2.6% growth in the year 2007-08, against the overall GDP growth rate of 8.7%. People in the government point out that the loan waiver is being offered in the wake of a sharp dip in the growth forecast for agriculture, which would seriously jeopardise the overall projected dream GDP growth rates of 9%.
In reality, the proposed write-off has less to do with the dip in the growth of the agricultural sector and more to do with the declining electoral fortunes of the ruling coalition and the Congress party’s growing concerns about its winning prospects in the next year’s general election.
With 57% of the country’s population dependent on agriculture as the principal source of livelihood, the falling contribution of agriculture to the GDP to well below 20% has exacerbated the urban-rural disparities and is stoking a lot of dissatisfaction among the rural populace.
The loan waiver is intended as a major sop to appease farmers who are unhappy with the UPA government for importing wheat at exorbitant prices, denying similar prices to domestic growers; offering lower minimum support price for paddy in comparison with wheat; increasing diesel prices; and promoting special economic zones, acquiring their lands at cheap rates.
I have repeatedly argued in this column that the agricultural sector is passing through an existential crisis and urgent and timely interventions are needed. In this regard, I welcome any initiatives intended to benefit farmers and the agricultural sector.
The moot questions are whether a blanket loan waiver is what is needed to help farmers in distress and boost agricultural growth and whether the initiative will help the electoral fortunes of the ruling UPA.
Most small and marginal farmers do not have access to institutional credit. Those among them who are successful in accessing such loans often end up as defaulters and eventually pay up by borrowing money from moneylenders at exorbitant rates. Farmers driven to distress are typically those who have exhausted all sources and are unable to repay their debts.
Among the chief reasons that are responsible for the falling agricultural growth and distress and indebtedness among farmers are: increasing costs of production and lack of adequate support and market prices for produce, making it unremunerative; repeated crop failures; lack of irrigation facilities; lack of adequate crop insurance; lack of institutional credit; and excessive reliance on moneylenders.
Alarmed by the spate of farmer suicides across the country, the UPA government had set up the Radhakrishna Committee to study reasons for indebtedness. Among other things, the committee has suggested setting up a Rs10,000 crore development fund for agricultural development in 100 agriculturally distressed districts and recommended a one-time measure of providing long-term loans by banks to farmers in order to help them repay their debts by setting up a moneylenders’ debt redemption fund.
Whether the government is serious about implementing these useful recommendations or sacrifices them in favour of populism to boost its electoral prospects, will be pointers to its real intentions.
A blanket waiver of all loans along proposed lines can cause serious distortions and encourage indiscipline among farmers who can afford to pay, and thus severely affect the future flow of credit to the sector.
The National Front government, headed by V.P. Singh, implemented a similar debt relief scheme in 1990. Agricultural debts of small and marginal farmers, to the extent of Rs10,000, were waived then. But it failed to lift the sagging electoral prospects of the ruling combine then. Can the UPA buck the trend?
Often these write-offs tend to benefit the banks more than the farmers as they recover non-productive agricultural loans. In the 1990 loan waiver, banks allegedly adjusted the amount of waiver to the loans that had already been repaid. Thus, the implementation of the scheme on the ground will actually determine whether it works to the political advantage of the ruling coalition or not. It is possible that farmers who have not taken loans from banks and those who have taken but repaid them are likely to feel that they have been deprived of benefits.
For every gain you make through populism, there is also a backlash.
One thing is obvious: Economic decision making in the UPA has clearly shifted into the hands of the coalition’s political leadership from the reform-minded duo of the Prime Minister and the finance minister. For the duo, political pragmatism has scored over prudent economics.
G.V.L. Narasimha Rao is a political analyst and managing director of Development and Research Services, a research consulting firm. Your comments are welcome at email@example.com