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Politics
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B&E
What about my loan
It is a mathematical masterstroke, and political populism at its best. But it will not help this poor farmer. He will continue to be at the mercy of the local moneylender
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 It was a cause for celebration. At many places, including at 10, Janpath, the residence of Congress President Sonia Gandhi, farmers danced. At the Congress headquarters, leaders espoused that this year’s Budget had pulled the rug from under the BJP’s feet. A BJP leader privately admitted that his party didn’t know how to react to the announcement. Even FM P. Chidambaram had that naughty and knowing smile when he announced the ‘Mother of all Loan Waivers’. He knew that this was the ultimate ‘populist’ political weapon to vanquish his opponents in the forthcoming general elections.
In many ways, the loan waiver of Rs.60,000 crore for small and marginal farmers was a mathematical masterstroke and brilliant ‘budget-o-nomics’. For one, it was the most populist Budget proposal in recent history. And it stumped all political and economic experts. Even the critics went about their task in a roundabout fashion. Uttar Pradesh’s Chief Minister Mayawati took out full page ads saying that this move would have been better if it had been taken four years ago, when the UPA came to power.
Devinder Sharma, a researcher who writes on food and trade policies, says that “the loan waiver is an historic step. It was desperately required.” Rajesh Mokashi, Executive Director, CARE, adds, “The step is a right one considering its positive social implications.” And, according to P.K. Joshi of the National centre for Agricultural Economics and Policy Research, “the scheme will temporarily give relief to roughly one-third of small and marginal farmers, and nearly half of large farmers.”
If one examines the loan waiver in terms of macro economics, Chidambaram seems to be holding all the four aces, including a few from another pack. Many have criticised him for reasons like the waiver will impact the bottomlines of state-owned banks, and add to overall fiscal imprudence and irresponsibility. Who’ll foot the bill, they ask, when the payback time comes? Like in the case of oil bonds, any mechanism to help the banking sector will poke a huge number hole in government finances.
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But there’s a catch; it’s called Catch 2008. Most of these loans either fall into the non-performing assets category, or were likely to do so shortly. So, the scheme is only a sleight of PC’s hand to clean up the balance sheets of public sector banks. The reason: in many cases, the farmers were unable to return their loans due to regular crop failures. Hence, the government will neither have to help the banks majorly, nor will it have to show the waiver amounts in its own Budget balance sheets.
Vibha Batra, Co-head (Financial sector Ratings), ICRA, agrees: “A large percentage of these overdues (of Rs.60,000
crore) could be on the books of cooperative banks and rural banks. Therefore,
the impact on scheduled PSBs may only be a subset of this amount. Further, the incremental hit on the PSBs’ capital
(assuming no reimbursement from the government) could be still lower to
the extent of unprovided NPAs, as these overdues could comprise interest overdues on NPAs (which are not booked
as income).”
At the same time, economists like Swaminathan Ankleswaria Aiyar feel that the waiver will reduce demand for farm loans in the next season, thereby allowing banks to lend more to other profitable entities. This will immediately improve their bottomlines in the coming year. In many ways, the state-owned banks will suddenly be in a much-better financial position, and will also be more prepared for Basel II norms as well as for the aggressive entry of foreign banks in 2009 due to changes in FDI norms.
However, there is a flip side to the issue. In fact, there’s another catch; it’s called Catch 60,000. And this shows that what Chidambaram has done is not going to make too much of a difference. It’s only a political hype; at the socio-economic level, the lives of the impoverished and suffering farmers will not change. In addition, the loan waiver scheme goes against the letter and spirit of the finance ministry’s report in July 2007 on agriculture indebtedness by a committee, headed by R. Radhakrishna.
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