The Great Indian Fiscal Budget

The Indian Budget finally takes note of the farm credit crisis – starting with a US$15 billion write-off for non-performing loans in the sector. The measures may reek of populism just in time for elections, but the bigger question is, will they deliver the greater good?

Every tenth Indian is a farmer.

Every thirty minutes or so, one of them commits suicide.

And that’s the official (read underestimated) number. They end their lives mostly by drinking pesticide; they are increasingly driven to it by unmanageable debt. Yet, they have been largely ignored by mainstream media and remain out of the urban consciousness.

But once in a while, they reach limelight. Last time they managed front-page coverage when the technologically-savvy, FDI-attracting and critically-acclaimed state Chief Minister Chandrababu Naidu lost an election – a loss that no one predicted but everyone post-facto easily explained. Media discovered at long last that Hyderabad may have turned Cyberabad, but a good part of the rest of his state was turning cemetery at the same time.

That pretty much sums up why Prime Minister Manmohan Singh’s government gave the budget it did last month. This was its fifth and final budget; elections aren’t too far.

The Election Budget

In 2004, the Congress party (which leads the ruling national coalition) used the common man platform to win the election. But it didn’t do enough to stem India’s human development index from moving in an unflattering direction. Even more worryingly, it performed badly in some key state elections in recent months.

The result is a budget that can be labeled populist with ease. Income tax slabs have been changed to effectively reduce the tax burden. Excise duties on all goods stand reduced, with small cars and two-wheelers winning exceptional cuts. Developmental projects ranging across irrigation, electrification, education and transportation have received considerable funds and a mention in the speech – they all add up to the promise of inclusive growth.

But the head turner in terms of scale and controversy is the “loan waiver”. It seeks to absolve small and marginal farmers (those with land holdings up to 2 hectares) of their unpaid loans. For larger famers, a rebate of 25% of the loan will be given against payment of the balance 75%. The bill – a whopping Rs600 billion (US$15 billion).

The loan waiver has been largely read as a political stunt by observers. Nevertheless, the stunt brings relief to 40 million farmers. The loan waiver is actually in the nature of a write-off: it is applicable only to non-performing loans that were already overdue in year-end 2007 and remained unpaid at the date of the budget. Given that these write-offs are entirely unanticipated, the beneficiaries will be genuine cases. In any case, as microfinance major Grameen Bank’s experience suggests, willful default is not really a malaise of this sector.

Interestingly, this move to address private debt comes at a time when capitalist icon United States, (also, near election year) is trying to protect homeowners and buffer them from the excesses of its banking sector. Clearly, debt restructuring, routinely done for corporate clients, has its role for individuals too – especially when the circumstances impact en masse.

That hasn’t stopped detractors from crying foul in India’s case, especially as the number involved is big. So it is pertinent to ask:

How big is Rs600 billion?

Rs600 billion is about 3% of system loans (estimates Citi). It will impact the fiscal deficit forecast of 2.5%, but to what extent is not known as the modalities of the write-off have not been announced so far. There has only been talk of providing liquidity to banks as compensation.

Further, judging from analyst reports, Rs600 billion is not big enough to rock the Sensex. Most agree that the current budget doesn’t move the market – except in the short term, and that due to increase in short term capital gain (up from 10% to 15%). “(The budget) is not decisive for market direction or level,” comments analyst Aditya Narain of Citi.

Unfortunately, Rs600 billion is not enough to rescue the farmer either. According to Indian press, four out of every ten rupees are owed to private, expensive moneylenders because bank credit is scarce. This segment has been entirely ignored.

Too little, too late

Private moneylenders may seem like an untenable segment – an entirely different animal from banks, which are limited in number, regulated by law, and thus amenable to policy implementation. But they can be roped in, says P Sainath, veteran rural journalist whose body of work earned him the Magsaysay award last year. He points out to the example laid by the state of Kerala where a debt relief commission was formed to broker settlements between the lenders and loanees.

That opportunity – as well as several others to attack the root cause of low incomes in agriculture – has been missed. “There is nothing in the budget that will raise farmer income. The waiver has to be located among several other steps that have not been taken,” says Sainath. The steps taken have their share of problems too.

Seems all poor families are poor in their own way. Take for instance the Vidharba region, address to a significant number of farmer suicides and an insignificant number of rural banks, where banking accounts for no greater than one-third of all farmer loans. Since private moneylenders are not covered in the budget, a high proportion of the poorest farmers are left out of the loop.

Among those Vidharba farmers fortunate enough to have bank credit, few are eligible for 100% write off - the average land holding in the region is 3 hectares (their land has lower productivity and irrigation, consequently they often own larger tracts).

Naturally, land-quality and bank-presence vary across India. Since the budget has not been customized to account for the differences, benefits will vary widely too. Counter-intuitively, the skewness works against the Congress, says Sainath: “ it undermines the farm base of the Congress in Vidarbha.”

In response to criticism and with a belated enlightenment, Congress’s heir apparent Rahul Gandhi (with three prime ministers in his bloodline) gave a speech in the post-budget session two weeks after the budget. He requested that the 2-hectare cut-off limit be adjusted for productivity of land. He also proposed that the cut-off date be adjusted to account for different crop cycles.

The tweaking will probably make it through and be a part of the final budget. But the matter is far from over or adequate.


Reprinted with permission from The Asset, who I write this article for.


Suggested further reading:
When is a sop not a sop?
Oh! What a lovely waiver