India mustn't kill loan sharks to help farmers

ANALYST'S VIEW

"If farmers don't have to repay their loans, why do I have to pay mine?''

That's the question Maheswar Jena of the village of Ankula in Orissa state has been asking himself ever since Indian Finance Minister Palaniappan Chidambaram announced a Rs 60,000 crore ($15 billion) debt waiver for farmers.

Jena, 38, had borrowed Rs 95,000 for five years from State Bank of India to set up a shop. That was about two years ago. Since then, the business has failed. And now Jena wants the heavily subsidized loan "� it carried an annual interest rate of 2.6 per cent "� to be forgiven.

The debt write-off, the centerpiece of India's February 29 annual budget, is threatening to balloon into a subprime crisis of sorts, complete with "moral hazard'' and fiscal recklessness.

In less than 48 hours after the amnesty was announced, the chief minister of India's most populous state had issued a full- page newspaper advertisement.

In the ad, Mayawati, who uses only one name and runs the northern state of Uttar Pradesh, expressed her displeasure that the finance minister hadn't forgiven the debt of artisans, weavers and other small, self-employed professionals.

Loan sharks
Mayawati didn't specify how the humble farmer should be extricated from the clutches of the loan shark. But others have.

Following Chidambaram's move, Agriculture Minister Sharad Pawar advised farmers not to pay loans they have taken from unauthorized moneylenders. These contracts, he said, should be cancelled. The minister couldn't have come up with a better proposal to kill Indian agriculture once and for all.

If the loan sharks are bankrupted, where would a small farmer get money to buy seed and fertilizer?

According to a 2003 assessment of farmer indebtedness conducted by the government, eight out of 10 farming households in India have 2 hectares (4.9 acres) of land or less; slightly more than half of them have no debt.

As for the rest, half of each household's average 9,000 rupee debt is to "non-institutional agencies,'' which is the government's euphemism for moneylenders.

The smaller a farmer's land holding is, the more indebted he becomes to the loan sharks. This is not by accident.

Banks don't lend
The formal credit-delivery system, which consists of government-owned and cooperative banks in the villages, lends hardly any money to marginal farmers. The latter have no alternative except to agree to pay usurious interest rates "� often 100 per cent a year "� to individual lenders.

Almost every small-business owner in the fast-growing economy is hungry for credit. Effective interest rates of 50 per cent a year and more are quite common even as the State Bank of India's published prime-lending rate, the one at which the bank lends to its best customers, is 12.25 per cent.

Hunger for credit
Surely it can't be easy for any business to survive "� let alone thrive "� when borrowing money is so expensive. But the reality is that there's demand even for such high-price credit.

The investment boom in India is very real and "� as the building of new airports, power stations, subways, roads and public amenities gathers momentum "� nowhere close to peaking.

It's the supply of credit that's a trickle. If the small and medium-sized enterprises saw their loans waived off, their equity in the business would increase. They would be able to borrow more money from lazy bankers who prefer to invest in government securities than support real businesses. I'm, of course, being facetious. But politicians in India are deadly serious.

Dangerous brinksmanship
Polls are expected to be held this year for the national parliament; as many as 10 state assemblies will elect their legislators in 2008.

A dangerous game of brinksmanship has begun with grave implications for fiscal prudence.

In the western state of Maharashtra, Shiv Sena, the main opposition party, has demanded that the entire debt of all farmers should be forgiven; Chidambaram's proposal offers full relief only to those families whose land holdings are tiny.

There is a message here for the urban middle-class in India. Perhaps it should stop paying its mortgage and credit-card loans and hope that these, too, would get written off by politicians as they get greedy for votes. This is only the beginning of the silly season of brazen appeasement of voters in India. Jena shouldn't lose hope.

(The author is a Bloomberg News columnist)