On Writing off Loans

Right now, the government is engaged in one of the most hazardous populist political games that involves the waiving of very substantial loans extended to farmers. At present, the exercise of waiving farm loans has been confined mainly to the States of Uttar Pradesh, Maharashtra and Telenga. However, the day is not far off when farmers of all States of the Union will clamour for such loan waivers. Among other States that are also planning farm loan waivers are Madhya Pradesh and Punjab. An influential farmers’ group in Assam also raised this demand on Sunday. The hazard of this bizarre loan waiver arises from the fact that the States involved do not have the means to grant such loan waivers without getting into very serious levels of indebtedness either to the Centre or to private fincial institutions. This first attempt at gratuitous populism implies the most ill-conceived notions of indebtedness to the detriment of both solvency and the very culture of efficient magement of funds.

The very fact that several Indian States have advanced loans to farmers, gives them a distinct advantage that may not be available to farmers in all other countries of the world. Farmers are supposed to make the most of such loans by investing in better seeds, fertilizers and pesticides in order to ensure better crops and larger profits. Farmers who would have been seriously handicapped without such loans, have reasons to feel relieved that their fincial problems have been at least partially solved by the loans. In the case of drought or floods or a poor monsoon, farmers could have been given further assistance by the interest on these loans (if any) being waived. Expecting the entire amount of loan to be waived is a somewhat irratiol and unreasoble expectation for producers in any field of human activity. The cost of the farmers’ loan waiver in just one State, mely Uttar Pradesh, is estimated to be Rs 36,000 crore. Maharashtra’s bill for the loan waiver is yet to be worked out, but is expected to be much lower. Once this loan waiver is conceded in one or two States of the Union, it will be virtually impossible for the other States not to implement such a populist move. And since most Indian States run on deficit budgets anyway, the huge sums involved in waiving farm loans would be beyond their fincial capacities. Quite obviously, therefore, the States will have no choice but to borrow—either from banks or from the public by floating bonds. The Centre has made it clear that it will not be in a position to provide any kind of fincial assistance sustain the farm loan waiver. On Monday, Union Fince Minister Arun Jaitley made it clear that States that were seeking to grant farm loan waivers “must generate funds from their own resources”. If even a majority of the Indian States decided to waive farm loans, we could have on our hands a debt burden the country may not be able to come out of in quite a few years. India’s public debt—the sum total of Central and State debt—is already 67 per cent of the GDP, the highest among major Asian countries, except Japan. Apart from the kind of fincial calamity that any tionwide waiver of farm loans could trigger off, there are constitutiol questions also that the tion would have to address. There is the fiscal responsibility legislation (FRL) that the Indian States had ected earlier. Under this legislation, the States are required to elimite their revenue deficits and to set a ceiling of three per cent of their gross state domestic product (GSDP) on their fiscal deficit. So far, most States have been able to meet these targets. At the same time, economic observers have noted with concern that a few years after the ectment of the FRLs, “all indicators of fiscal performance—deficits, expenditure and off-budget activities—have started deteriorating”. In addition to this deterioration, there are also constitutiol problems about off-budget expenditure that any farm loan waiver will involve. Under Article 293(3) of the Constitution, States must take the consent of the Centre for any additiol borrowings they make. One does not see how the States can afford to handle the farm loan waiver without borrowing, since the working principle seems to be that the loans must be waived first and the hunt for the cash carried out later on. It is doubtful whether the Centre can withstand the pressure of demands for fincial assistance made by the States to implement farm loan waivers, since it has already created the unfortute precedent of committing to undertake the farm loan write-off of Uttar Pradesh. How can it take on the farm loan waiver burden of just one State (estimated to cost Rs 36,000 crore) and refuse to entertain demands made by other States for similar fincial assistance?

No one in his right senses will object to any fincial benefits being advanced to farmers who feed the tion sometimes even under the most adverse conditions. They deserve all the benefits that the tion can bestow on the most deserving section of our workers. What is wrong with the unplanned mode of granting a well-deserved fincial benefit is the total lack of proper planning that should invariably precede all such initiatives. We have a clear picture of a populist measure that has suffered from proper planning. The typical lack of fiscal discipline that characterizes much of our government initiatives is in evidence in the farm loan waiver initiative as well. In the government’s imperative of directing States to waive the farm loans first and then to undertake the frenetic hunt for cash, there is strong evidence of the government penchant for putting the cart before the horse. It is perhaps idle to expect anything better from a government that has given us countless instances of wasteful spending of public funds and improper budgeting of such funds.