Political ploys initially hailed as master-strokes often end up as flops. The Rs. 60,000 crore farm loan waiver announced in the budget writes off 100% of overdues of small and Marginal farmers holding upto two hectares, and 25% of overdues of larger farmers.
While India has enjoyed 8%-9% GDP growth for the past few years, the boom has bypassed many rural areas and farmer distress and suicides have made newspaper headlines. Various attempts to provide relief (employment guarantee scheme, public distribution system) have made little
impact, thanks to huge leakages from the government's lousy delivery systems. So, many economists think the loan waiver is a worthwhile alternative to provide relief. However, the poorest rural folk are landless labourers who get neither farm loans nor waivers.
Half of the small and marginal farmers get no loans from banks, and depend entirely on moneylenders, and will not benefit. Besides, rural India is full of the family holdings rather than individual holdings and family holdings will typically be much larger than two hectares even for dirt-poor farmers, who will, therefore, be denied the 100% waiver.
It will thus fail in both economic and political objectives. IRDP loans to the rural poor in the 1880s demonstrated that crooked bank officials demand bribes amounting to one third the intended benefits . Very few of the intended beneficiaries who merited relief received it. After the last farm loan waiver will similarly slow down fresh loans to deserving farmers.
While overdues to co-operatives may be higher, economist Surjit Bhalla says less than 5% of farmer loans to banks are overdue i.e. overdues exist for only 2.25 million out of 90 million farmers. If so, then the 95% who have repaid loans will not benefit. They will be angry at being penalised for honesty.
The budget thus grossly overestimates the number of beneficiaries. It also underestimates the negative effects of the waiver encouraging willful default in the future and discouraging fresh bank lending for some years. Instead of trying to reach the needy, through a plethora of leaky schemes we should transfer cash directly to the needy using new technology like biometric smart cards, which are now being used in many countries, and mobile phones bank accounts.
Then benefits can go directly to phone accounts operable only by those with biometric cards, ending the massive leakages of current schemes. The political benefits of the loan waiver have also been exaggerated since if only a small fraction of farm families benefit, and many of these have to pay bribes to get the actual benefit, will the waiver really be a massive vote-winner?
Members of joint families wall feel aggrieved that, despite having less than one hectare per head, their family holding is too large to qualify for the 100% waiver. All finance ministers, of central or state governments, give away freebies in their last budgets, hoping to win electoral regards. Yet, four-fifth of all incumbent governments are voted out.
This shows that beneficiaries of favours are not notably grateful, while those not so favoured may feel aggrieved, and vote for the opposition. That seems to be why election budgets constantly fail to win elections in India and the loan waiver will not change that pattern.
What message will the loan waiver send to farmers who have repaid loans?
