Subir Roy: How to make farm loan waiver work

VALUE FOR MONEY

The farm loan waiver announced in the Union Budget is like a key crossroads from which major roads go out in different directions, each signifying opposite journeys and consequences. It is the biggest event of its kind, the fiscal payout of Rs 60,000 crore being virtually three times larger than the Rs 20,800 crore recapitalisation process that set Indian public sector banking on its feet. Appropriately handled, the latest dole-out can set the ball rolling for a comprehensive revival of Indian agriculture. But in the diametrically opposite direction lies another road, this one to perdition in the shape of continued farmers' distress, food shortages and worse. Another pair of roads signifies similar opposites "" one leads to a fine new chapter in the history of Indian banking, the opposite one to its severe decline.

Let's list the positives first. This is a major political initiative, in anticipation of critical electoral denouement ahead, which is how policy crossroads are passed in democracies. It acknowledges that there is a crisis in agriculture and sends a message to farmers and the countryside that the rulers and metropolitan centres of national life are not ignoring the crisis in the huge national hinterland. It has the possibility of delivering a major blow for inclusive growth; a signal that after enjoying several years of enormous growth the cities are willing to pass on a part of the riches to those left out.

The downside is the risk that a first step to tackle a major problem will remain that, without being followed by others. If this were to happen, not only will the agricultural crisis remain, to it will be added another crisis "" in banking. The risk inherent in the exercise is highlighted by the anecdotal tales pouring into bank head offices: individual farmers who had already repaid their loans have started to troop to their respective rural branches and are cursing the officials concerned for being so aggressive in loan recovery. Those farmers are ruing that if only they had not paid up so promptly, they would have saved the cash.

The success of agriculture and the future of banking are closely intertwined. A whole range of measures have to be taken to restore agriculture to viability. At the centre of it all stand the agencies "" commercial, rural and cooperative banks "" which have to look at each farmer's case separately, assess the nature and cause of distress and refinance future packages which will embrace many new initiatives. One farmer's crop may have failed because the weather or poor seeds let him down, in another case he may have eaten up his capital by treating an illness or getting a daughter married, and in yet anther case distress may have come out of success "" a bumper crop leading to a crash in prices.

Without individual assessment, a blanket write-off will not allow financing of specific variegated needs and there will be no chance of farmers turning financially viable again. Then demand for debt write-off will become an annual feature. Once that happens banks will be in the doldrums and agriculture will be in similar straits. The hope of farm revival lies in providing the foundation for a physical package of technology and inputs. Without that financial package being professionally handled the future will be grim for both. Giveaways seen to be so will ruin the culture of repaying bank loans and have the same pernicious effect that Loan Melas had in an earlier period.

This is a great opportunity to use banks as a primary agent for broad-based development. According to Kaushik Basu (Economic and Political Weekly, February 2, 2008), the first significant growth impetus in the history of independent India was delivered by the nationalisation of banks in 1969 (they were forced to expand the branch network) and start of UTI in 1964, which together gave a boost to the savings rate. Conversely, the lost decade of growth in Latin America in the eighties is attributed to the drying up of credit "" denial of even working capital credit to SMEs "" as a result of the IMF-prescribed monetary tightening to curb inflation. The point is, only broadbased credit delivery through a professionally-run financial network can deliver broadbased growth.

What needs doing to tackle farm distress is highlighted by what is currently happening to the potato crop. Important parts of the country have had a bumper crop and prices are down. In West Bengal, where the potato is an important cash crop, farmers are trooping to cold storages to place their produce. The cold storage receipt should be negotiable in banks, allowing the farmer to get cash to repay the financing that he had obtained for the crop. In Gujarat, where there is a shortage of cold storages, the state government has announced a support price. Otherwise, there will be distress sale. So the essential elements are good farming practices (these enable regions to produce a marketable surplus), cold storage, support price and of course banks, which ultimately provide the liquidity.

A far larger rural network of bank branches to offer grassroots support to the agricultural economy is not the most profitable avenue open to banks right now. But they can be asked to do this as they were asked to expand their branch network in the seventies. Once farm support is rendered through them, farm viability will be restored. The best analogy one can find right now is the railways "" they are modernising, becoming more professional, and carrying a political and social burden. That's the way to go.

subir.roy@bsmail.in