‘Karza maaf’’ may create a dangerous precedent

The Congress’ pre-poll promise of farm loan waivers clicked spectacularly in Chhattisgarh. In Telengana, it fell miserably flat. A curious outcome, given that the incidence of rural indebtedness in Telengana is two-and-a-half times that in Chhattisgarh (NABARD, 2017).

Could it be that Chief Minister K Chandrashekhar Rao’s (KCR) existing rural welfare schemes had so much traction that farmers were not taken in by the Congress’ electoral promises? It may be recalled that KCR announced and commenced the implementation of India’s first-ever direct farm subsidy programme well before the assembly elections.

Another reason for the failure of the Congress could be the fact that in neighbouring Karnataka, the party’s promise of a Rs 44,000 crore-loan waiver has come to nothing, seven months after the fact. (Karnataka Cooperation minister Bandeppa Kashempur admitted earlier this month that only 800 farmers had benefitted to date).

In addition to loan waivers, the Congress promised a hefty bonus on minimum support price (MSP) for paddy, which Chhattisgarh has now pegged at Rs 2,100 per quintal. The NDA government, it may be recalled, had hiked MSP to 1.5 times the input cost earlier this year.

It must also be noted that the Congress’ pre-poll promises did not have as much traction in Madhya Pradesh as they did in Chhattisgarh. Can this be attributed to the fact that the BJP government had implemented a price deficiency payment scheme (PDP) for farmers, to bridge the gap between the open market prices and MSP? Less than a quarter of the farmers benefited from the scheme, however. In the hue and cry over competitive populism, one fact stands out: sops to farmers yield excellent electoral returns. So, we have three models for relieving farmers’ distress and/or purchasing votes: loan waiver, direct farm subsidy and increase in MSP-PDP.

All three have proved politically effective, but have raised serious concerns about their impact on the economy. This is particularly true of loan write-offs. To a man, agriculture economists have denounced farm loan waivers as unproductive and harmful in the long-term, although some have entered the caveat that it is a much-needed policy intervention to off-set the impact of demonetisation on the rural economy.

That loan waivers negatively impact taxpayers is a no-brainer. State governments use public funds to pay off banks who hold farmers’ loans, effectively transferring money from the pockets of taxpayers to borrowers. States like Madhya Pradesh are already faced with a ballooning fiscal deficit and debt waivers will make matters worse. They must borrow to make ends meet. Higher borrowing by governments means increased cost of borrowing for others, which impacts growth.

A bloated fiscal deficit means less money for expenditure on health, education, infrastructure and so on, which translates into fewer services for the poor and this again impacts growth. An even bigger problem is that it penalises honesty and self-sufficiency and creates what bankers call a ‘moral hazard’. By and large, the farmer is an honest soul who likes to repay his debts. This is not just a romantic fiction, but is borne out by the fact that default on farm loans is a lot less than that of corporates.

Along comes a politician and declares ‘karza maaf’. This is manifestly unfair to farmers who did not – or could not – take loans from banks and also to those who repaid their loans in a timely fashion. Farmers who have the capacity to repay (and these are the ones who find it easiest to get loans) get away with a free bonus. Those who take loans from informal channels (because banks refuse to ante up) suffer.

Bankers are fearful that the virtual institutionalisation of loan waivers will encourage farmers not to repay loans, resulting in a gradual increase in agriculture NPAs. This will make future access to credit harder for all farmers. Studies have shown that loan waivers result in a subsequent credit squeeze as banks tighten norms – after the 2008 mega-loan waiver, bank lending moved away from the districts which saw the most write-offs.

So, as the late Atal Behari Vajpayee observed, loan waivers are a bad idea and farm distress can only be relieved by making agriculture lucrative. Are higher MSPs the way forward? The criticism is that not enough farmers benefit from MSPs – only those with a substantial surplus. Anyhow, MSP is intended only as a supportive measure and not the default price of farm produce. Open market prices should be higher than MSP in a normal year and not the other way around. The MSP regime bears testimony to the weird distortion of India’s food economy. As for PDP, it sounds great on paper, but is subject to abuse by middlemen, who underpay farmers on the premise that they will be compensated through public monies. (Alas for the taxpayer.)

Direct farm subsidies, as implemented in Telengana, have the least distortionary effect, according to Indian Council for Research on International Economic Relations (ICRIER). KCR had now suggested that an annual subsidy of Rs 10,000 crore be implemented across the country. ICRIER estimated that this would cost the government a shade under Rs 2 lakh crore – much less than a pan-Indian farm loan waiver – and would prove far more productive. But politicians are in no way invested in relieving farmers’ distress; it suits them to have farmers dependent on government patronage and vulnerable to promises of freebies.

—Bhavdeep Kang  is a senior journalist, an independent writer and author.

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