Loan waiver: Not an election winner
9 Mar 2008, 0000 hrs IST,Swaminathan S Anklesaria Aiyar
Political ploys initially hailed as master-strokes often end up as flops.
I
suspect this will happen to the Rs 60,000 crore farm loan waiver announced
in the budget. It writes off 100% of overdues of small and marginal
farmers
holding up to two hectares, and 25% of overdues of larger farmers.
Finance minister P Chidambaram has been congratulated both by economists
(who think the waiver will relieve rural distress) and Congress colleagues
(who think the waiver will win them the next general election). I suspect
the waiver will fail in both its economic and political objectives.
India has enjoyed 8-9% GDP growth for four years, but the boom has
bypassed
many rural areas. Farmer distress and suicides have made newspaper
headlines. Various attempts to provide relief (employment guarantee
scheme,
public distribution system) have had little impact, thanks to huge
leakages
from the government's lousy delivery systems. So, many economists think
the
loan waiver is a worthwhile alternative to provide relief.
The aim is worthy, but not the method. The poorest rural folk are landless
labourers, who get neither farm loans nor waivers. Half of small and
marginal farmers get no loans from banks and depend entirely on
moneylenders, and will not benefit. Besides, rural India is full of family
holdings rather than individual holdings, and family holdings will
typically
be much larger than two hectares even for dirt-poor farmers, who will,
therefore, be denied the 100% waiver.
IRDP loans to the rural poor in the 1980s demonstrated that crooked bank
officials demand bribes amounting to maybe one-third the intended
benefits.
This will surely happen in the new loan waiver too.
After the last farm loan waiver in 1990, many banks went slow on fresh
farm
loans for some years. Chidambaram's waiver will similarly slow down fresh
loans to deserving farmers.
In sum, only a small fraction of deserving farmers will benefit, most will
get only a fraction of the promised benefits, and many undeserving
defaulters (and crooked bank staff) will be significant gainers.
Economist Surjit Bhalla says less than 5% of farmer loans to banks are
overdue. If so, then the 95% who have repaid loans will not benefit. They
will be angry at being penalised for honesty. The beneficiaries will
include
some of the truly distressed who merit relief, but will also include
cynics
who can afford to repay but have not done so, anticipating a waiver.
Chidambaram says the waiver will benefit 40 million farmers. This amounts
to
almost half of India's 90 million farm households. But only a fraction of
farmers have bank loans, and only 5% of these are overdue, according to
Bhalla.
Going by this calculation, overdues should exist for only 2.25 million
farmers. Overdues to co-operatives may be higher. Yet, it is impossible
that
half of India's farmers are defaulters: bank experience is far, far
better.
So, the budget grossly overestimates the number of beneficiaries. It also
underestimates the negative effects of the waiver-encouraging wilful
defaults in future, discouraging fresh bank lending for some years.
What is the alternative? I have long argued that instead of trying to
reach
the needy through a plethora of leaky schemes that let very little
through,
we should transfer cash directly to the needy, using new technology like
biometric smart cards and mobile phone bank accounts.
This technology is being tried in a pilot project in Bihar. It needs to
cover all India. Then benefits can go directly to phone accounts operable
only by those with biometric cards, ending the massive leakages of current
schemes. Mobile phones will soon cover almost the whole country, and
biometrics are now used in many countries.
The political benefits of the loan waiver have been exaggerated no less
than
the economic ones. If only a small fraction of farm families benefit, and
many of these have to pay bribes to get the actual benefit, will the
waiver
really be a massive vote-winner? All Opposition parties have long been
demanding loan waivers, and many will promise to make the waivers deeper
and
wider if elected. It is actually logical for farmers to vote for
Opposition
parties, hoping to get more than Chidambaram has promised.
Besides, psychological studies show that people are especially unhappy
when
their neighbours move ahead of them, the more so if the neighbours have
received government favours denied to others. Those who have repaid their
loans will be very angry that Chidambaram has forgiven the loans of their
dishonest neighbours.
Members of joint families will be aggrieved that, despite having less than
one hectare per head, their family holding is too large to qualify for the
100% waiver.
All finance ministers, of the central or state governments, give away
freebies in their last budgets, hoping to win electoral rewards. Yet,
four-fifth of all in***bent governments are voted out. This shows that
beneficiaries of favours are not notably grateful, while those not so
favoured may feel aggrieved, and vote for the Opposition. That seems to be
why election budgets constantly fail to win elections in India. I do not
think the loan waiver will change that pattern.
http://timesofindia.indiatimes.com/Swaminomics/Loan_waiver_Not_an_election_winner/articleshow/2848567.cms
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