 "Here's why loan waivers are bad for the farmers")
What do Devi Lal, P Chidambaram, Chandrababu Nadu and K. Chandrashekhar Rao have in common?
All of them have announced debt waiver schemes for the farmers.
Debt waiver and other loan waivers schemes have been used as a political tool to win elections. However, do they really help the intended beneficiary at the cost of the economy is a debatable question.
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A Parliamentary Public Accounts Committee has found out that in the case of Rs 52,000 crore debt waiver scheme announced by P Chidambaram in 2008, there were serious concerns over its implementation. In a sample of 90,576 beneficiaries/farmers spread across 25 states out of the intended 3.69 crore beneficiaries, discrepancies were found in 22 per cent of the cases. Acts of omission and commission were observed in paying money to those who were ineligible (persons who had taken personal loan, vehicle loan or gold loan were also reimbursed), depriving those who were eligible, overpaying some beneficiaries and paying less than what was due to others.
In his book The Changing Profile of Indian Agriculture, Author and Business Standard Columnist Surinder Sud says that Devi Lal's loan waiver scheme of 1990 has reportedly crippled rural credit structure to such an extent that it took decades to recover from its impact. The loan waiver had a negative impact on the credit culture as it encouraged farmers to wilfully default and made even the healthy commercial banks wary of lending crop loans to the farmers.
Yet we still have progressive politicians using waivers as a political tool to come to power. Chandrashekhar Rao, Chief Minister of the newly formed Telangana state used it as a election sop and so did Chandrababu Naidu, Chief minister of Seemandhra- a man who is well known for his affinity to policies that induce development.
Within a week of taking oath as the chief minister, Rao realised his mistake. He has tried to curtail the exposure to loan waivers by announcing filters. The loan waiver scheme will only be applicable to those farmers who loans less than Rs 1 lakh. Also the waiver will only be applicable to loans taken in the previous year. This resulted in sporadic incidents of riots and demonstrations in Telangana by farmers who felt betrayed after these caps were announced. Farmers in Telangana owe Rs 40,994 crore to the banks. The amount comes down to Rs 19,600 crore for those farmers taking less than Rs 1 lakh loan and comes down further to around Rs 12,000 crore if the list is restricted to those farmers who have availed the loan in the last one year.
In the state of Seemandhra, the total loan amount works out to be Rs 54,000 crore. If the same caps as those applied in Telangana are used, the figure comes down to Rs 19,000 crore. Ironically, Naidu's party has objected to the filters imposed by Rao for the waivers.
So who pays the bill for such populist measures?
Normally the government pays or promises to pay the banks who are too fragile to absorb such high levels of default. In the case of Telangana and Andhra Pradesh, bank officials have already met the two political heads and appraised them of the bills that they will be sending if the government goes ahead with its waiver plans. Andhra Pradesh government already has a huge deficit and cannot afford to fund the entire Rs 54,000 crore through a waiver scheme.
Banks have asked the respective governments to pay them the amount in cash. But knowing the poor financials of both the states, they are likely to get long term state government bonds. Banks have asked the states to give them SLR status bonds, so that they can sell it in the market and get reimbursed. If the SLR status is not given then the banks are not willing to give the states a long lease by way of tenure, they would be interested in short term bonds which can be encashed sooner than later.
Waiver or no waiver, in any case the farmer stands to be the biggest loser. For the short term they can reclaim his money, but after that he becomes non-bankable. Banks would naturally not like to lend to these farmers in the future as seen after 1990 and 2008. The priority sector lending is met by indirectly financing the farmer by giving the pesticide, fertiliser or seed companies enough leg room who in turn sell their products to farmers on credit.
Both the chief ministers of erstwhile Andhra Pradesh have achieved their political goal by announcing the waiver scheme. But the money recovered by way of taxes (higher taxes in all probability) over the next few years would go to fill the hole created by the loan waiver which would have otherwise been used for development.