Budget 2008 proved true to the expectations that it would be a populist Budget. Presenting the last full Budget of the United Progressive Alliance government, finance minister P. Chidambaram had something for everyone—from farmers to the average taxpayer, and for both rural and middle class urban voters. However, the biggest announcement in India remains the largest ever farm loan waiver in India, encompassing all sections of the farming community.
This includes a full waiver for small and marginal farmers, but medium and large farmers also stand to benefit with 25% of the outstanding amount propopsed to be waived if they pay up the remaining 75%. This may certainly be music to the ears of farmers who were fortunate to avail loans from institutional sources. However, as the farmers’ survey of the National Sample Survey Organisation showed, this may benefit less than half of the indebted farmer households as institutional sources account for less than 60% of all farmer loans. More than that, the fact that it took thousands of farmers’ lives and an election year for the government to realize this shows its lack of sincerity in doing something substantial for farming.
Himanshu, Assistant Professor of Economics at Jawaharlal Nehru University, New Delhi
Nonetheless, the waiver in itself is a welcome step, though late in the day. This will at least help the middle and small farmers in mitigating the debt burden.
However, two of the important recommendations of the Radhakrishna Committee on Agricultural Indebtedness, which deserved some serious attention, seem to have been bypassed. The first concerns the measures recommended by the committee for financial inclusion of the financially excluded section of the farming community. The loan waiver does not offer anything for these farmers who not only pay the highest rate of interest, but are also vulnerable to the high-handed tactics of moneylenders. It is these farmers who are taking their lives in distress, not the privileged ones who have access to institutional sources. The second concerns the recommendation on creating a Price Risk Mitigation Fund to compensate farmers in situations of price collapse. Moreover, the proposal to reduce the interest rate to 4% also seems to have missed attention. These are measures that would have had a long-term impact on insulating the farmer from the clutches of moneylenders as well as from sudden risks from price volatility. Perhaps, short-term electoral gains from populism are far more lucrative than a genuine effort to take care of farmers’ credit needs.
Unfortunately, in the euphoria generated by the debt waiver, the real issues of agricultural revival have taken a back seat. The most important issue that still plagues Indian agriculture is the decline in public investment, which has been continuing for almost two decades now. The finance minister may take credit for improving the rate of capital formation from 10.2% (2003-04) to 12.5% (2007-08); this is not so much due to increasing investment in agriculture (Rs12,000 crore since 2001-02, 4.7% per annum in nominal prices, negligible in real prices) as much as it is due to the low growth of agricultural gross domestic product. As a proportion of total capital formation, the capital formation in agriculture has declined from an average of 8% during the previous National Democratic Alliance government’s rule to less than 6% under the UPA government. As far as the government’s claim of doubling credit growth during the UPA years is concerned, a recent article in the Economic and Political Weekly by R. Ramkumar clearly shows that a large part of this was accounted for by changing definitional categories. Moreover, almost one-third of this growth was accounted for by indirect finance to agriculture. Ramkumar’s study clearly rejects any misconception that the growth of agricultural credit has benefited marginal, small and medium farmers. Finally, a major reason for farmers falling into debt trap is declining profitability, primarily due to increasing input costs. There has been no genuine effort to address this in the Budget. If the farm sector is showing signs of revival, it is not due to the minister’s efforts— clearly targeted at the farmer as voter—but despite them. Clearly, the objective is to treat the symptom, not the disease.
The author is assistant professor of economics at Jawaharlal Nehru University, New Delhi, and visiting fellow at Centre de Sciences Humaines (CSH), New Delhi.
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