Farm Loan Waivers: A Slippery Slope Into Chaos

Farm Loan Waivers: A Slippery Slope Into ChaosFarm loan waivers must end.
Snapshot
  • What if tomorrow the middle class organises itself politically and agitates to default on home, car, personal, education and other loans?

On the one hand, the Indian economy wants the non-performing assets (NPAs) of commercial banks to reduce, even end, and hence the pressure on bankers to clean up their books — fair. We want to arrest and put criminal charges on wealthy promoters who drive their companies aground using public money in the form of loans and equity — fair. We want to jail real estate tycoons who, taking loans from banks and advances from consumers, do not deliver the houses — fair. Irrespective of the reasons, economic, business or simply corruption, India seeks the best global practices of financial behaviour from those who wear suits, drive luxury cars, live in huge farms, fly in private jets, buy their children Ivy League education — fair. They seek the highest moral and material practices from households that strive to make ends meet, take loans to buy homes and consumer goods — fair.

On the other hand, Maharashtra, on 12 June, has given a farm loan waiver to the extent of Rs 1 lakh to each of its 3.1 million farmers, placing the burden of up to Rs 30,000 crore on other citizens from the taxes they pay — fair? Maharashtra follows the model of Uttar Pradesh (UP), which had waived Rs 36,000 crore to benefit 8.6 million farmers on 4 April — fair? UP, in turn, follows Tamil Nadu in waiving off Rs 5,780 crore for its 1.7 million farmers, which has been raised to Rs 7,760 crore by the Madras High Court — fair? Coming up: a loan waiver programme from Punjab. Three of these four governments, Tamil Nadu, UP and Punjab, had promised loan waivers to farmers in the elections that brought them to power; Tamil Nadu in 2016, UP and Punjab in 2017 — fair? Do remember, farmers pay no income taxes or income from farm incomes — fair? The total waiver to farmers in the three states so far is Rs 73,760 crore. By the time Punjab makes good its waiver promises, the figure could touch Rs 100,000 crore this month itself.

Maharashtra, UP, Tamil Nadu and Punjab is a fearsome foursome, three of which are carting high deficits in their books. For 2016-17, and before the waiver announcement, UP’s budget estimates of fiscal deficit stood at 3.9 per cent, that of Tamil Nadu’s at 3 per cent, Punjab’s at 2.9 per cent and Maharashtra’s at 1.6 per cent. Other elements remaining constant, UP’s existing Rs 49,960 crore deficit will rise by 72 per cent following the waiver and as a percentage of state GDP (gross domestic product) will increase to 6.7 per cent. Maharashtra’s deficit (Rs 35,030 crore) is today in a relatively comfortable position, but this will rise by 86 per cent, taking its deficit close to 3 per cent. Likewise, Tamil Nadu, whose Rs 40,530 crore deficit will rise to 3.5 per cent, following a 19 per cent increase due to the waiver. The final figures should be lesser than the projections, as we have not taken growth of the state GDPs into account.

The economic implication of these wasteful waivers is that the political leadership is willing to bring fiscal risks on its state finances. This is a democratic inheritance that we can do without. The economic moral hazard aside, this is a political hazard too. By these doles, the incentive systems of electoral decisions are changing. The people are not voting political parties but loan waivers, they are not voting for leaders but have made unholy deals with them, they are not voting an ideology but their petty self-interests. While Maharashtra’s case is a little different — the agrarian crisis had not reached political levels then and hence no pre-election promises — there is no need to cry over the milk being spilled on the streets of the state as part of farmers’ protests; Maharashtra’s is the fruition of a demonstration effect.

In effect, the politics of farm waivers is changing the texture of politics itself. It is turning electorates apolitical to the extent that parties are becoming mere labels and brands in the malls of farms. It is transforming voters into dealmakers. It is demonetising the currency of economics and replacing it with politics. It is ushering in the moral hazard, with farmers wilfully defaulting on loans in hope of waivers. To be a little inelegant: politics is using economic bribery to buy power. All eyes are now on Punjab Chief Minister Amarinder Singh of Congress, who will definitely follow Maharashtra Chief Minister Devendra Fadnavis of BJP, who followed UP Chief Minister Yogi Adityanath of BJP, who followed Tamil Nadu Chief Minister Edappadi K Palaniswami of AIADMK, to waive off farmers’ loans. Across parties and ideologies, Indian politics wants to continue with a practice that is now simply out of tune with twenty-first century India.

All voices of economic reason are being smothered by the brute force of a politics that has the people’s mandate. “We feel that in case of a (farm) loan waiver there is always a fall in credit discipline because the people who get the waiver have expectations of future waivers as well. As such future loans given often remain unpaid,” State Bank of India chairperson Arundhati Bhattacharya said. The reaction: protests by Congress, NCP and Shiv Sena. “After loans were waived off in 2008 (by the UPA 1 government), 16,000 farmers committed suicide till 2014. So, it is proved now that by just waiving off loans you cannot stop suicides. You need to create a mechanism that can help farmers,” Maharashtra Chief Minister Devendra Fadnavis said. The response: ruckus in the Maharashtra Legislative Council by the Opposition. In the face of competitive politicking, there is no space left for reasonable policy-making.

The focus of political leadership today should be to change the discourse from doles and moral hazards to markets and opportunities. It needs to help transition small and marginal farmers towards greater productivity in agriculture through cooperatives for greater bargaining power. It needs to bring intensive farming solutions using low-cost techniques and low-water usage to raise yields. It needs to create venues for, and open pipelines to, greater market access, using finance. It needs to catalyse and speed up all these initiatives through the use of digital technologies. Above all, it needs to exploit the opportunity to move marginal farmers and farm labourers to higher-return areas of organised manufacturing and services.

The attention of politics is being diverted towards using loan waivers to attract, nurture and invest in voters. Mass defaults are becoming a best practice. Let’s not tarnish farmers for enjoying the fruits of moral hazard: which economic agent, in his right mind, will pay a loan if he knows that a waiver is just one election away? Just because farmers are better organised politically, this financial misbehaviour is being legitimised — and, to be fair, it has worked by bringing parties to power. But if defaults are the new politics and organisation its new expression, what stops middle-class households from getting together and defaulting on home loans, car loans, personal loans, education loans? Getting organised is not very difficult today, once it’s known that there are financial benefits at the end of some dharnas, some stripping, some noise-making, some social media hashtags. Before the lull of farm loan waivers becomes an economic storm of mass defaults, India’s politics needs to step in. Farm loan waivers must end.

This article was first published on Observer Research Foundation and has been republished here with permission.

Gautam Chikermane is a writer tracking the world of money, power and faith. Currently Vice President at Observer Research Foundation, his latest book, Tunnel of Varanavat, was published in March 2016. Views are personal. Twitter: @gchikermane

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