Finance minister Chidambaram is setting a very dangerous precedent with the farm loan waiver scheme, an easy populist option future governments will find hard to resist By Vivek Sharma

"Let every politician and political party take a stand on our decision to write off farmers' loans. They should stand up and say if they are for the farmers or against them. If they have the courage to oppose, they should stand up and be counted."

That was finance minister Chidambaram, in a post-budget interview, defending his proposal to waive off Rs60,000 crore of farm loans. While it sounds more like George Bush's ultimatum to other countries after the 9/11 attack, it doesn't take a politician of Chidambaram's intellectual brilliance to know that no opposition politician can afford to take up that challenge. The best challenge opposition politicians could muster against Chidambaram's election-eve masterstroke was to suggest that the proposal is too late in coming.

UPA chairperson Sonia Gandhi, at whose behest this grandiose handout is likely to have been made, called the move 'historic and revolutionary'. Even the communists who insist on absolute rights over all things revolutionary must have been stumped by that!

Opposition politicians won't forget this, especially if the Congress party is seen to have benefited in the next election. When they get an opportunity, expect them to make even bigger write-offs. Then it will be the turn of Chidambaram to answer their challenge.

Why should taxpayers pay for this?

Presenting the proposal, Chidambaram asked the 'people of India' to help the government implement this 'momentous decision'. It is indeed momentous for Chidambaram and his party and, hopefully, will be momentous to those marginal farmers who are lucky enough to have taken a loan and then not to have repaid it. But, what is so momentous in it for the rest of the population who will end up bearing the cost?

Of course, the proposal is to compensate for the 'immense contribution' of farmers to this country. Why is it that only farmers are seen to be making such contributions, though their collective real contribution to the economy is far less? Will the government also consider such favours for 'marginal' industrialists who own no more than one tiny manufacturing unit? Or for 'marginal' transport service providers who own no more than one auto-rickshaw or a taxi car?

Why do we dole out such huge fiscal benefits to farmers? They don't pay for electricity or water in many states, fertiliser is subsidised and farm loans are cheaper. After all these, they get price support when they bring the produce to the market. And there is no income tax on agricultural income, which allows the rural rich with thriving businesses to avoid paying tax by claiming all their income as farm income.

When will the government start treating farming like any other economic activity? Will it ever be accepted that, like all other economic activities and for long term sustainability, farming needs a conducive environment with proper infrastructure and efficient markets for the produce?

Anyone with a strip of farm land can take a farm loan, irrespective of whether farming is the principal vocation of the borrower and the money is being borrowed for non-farm purposes. Banks prefer these kind of borrowers as the credit risk is lower when compared to 'real' farmers, but at the same time the loan qualifies as priority sector lending. It is quite likely that a sizeable portion of the farm loans now proposed to be written off have gone to those who are not really farmers. Why should taxpayers pay for this?

Show me the money!

The worst part is Chidambaram still hasn't figured out where the money will come from, if he himself has to foot the bill. If he is not planning to bear the cost himself, he will have to force the cost on the hapless public sector banks. The finance secretary, appearing on a television program, said the ministry has already done the homework on how to implement the scheme and now only has to 'fine tuning' it, before a formal announcement. If the government has indeed done the home work, why not at least disclose who is going to pay for the grandiose plan? The modalities and details can come later.

The only indication the finance minister has given so far about how he is planning to pull this off is when he said 'sufficient liquidity support will be provided to banks' to implement the scheme. What does he mean by 'liquidity support'? It is quite likely that he is thinking of something similar to the oil bond scheme to finance the farm loan waiver.

Chidambaram set a very dangerous precedent with his 'ingenious' oil bond scheme to subsidise retail fuel prices. Instead of choosing to pay for the subsidy costs from current revenues, the government has been deferring the costs by issuing bonds to the oil companies. So, the subsidies cease to become the headache of the current finance minister - but of some hapless politician who will land that job at the North Block many years from now. This ingenuity helped the government to keep oil prices steady, even when international oil prices went up over 40%. And Chidambaram keeps boasting about the improvement in fiscal deficit, which is illusory without considering the impact of oil subsidies.

Will he do something similar with the banks? Chidambaram's easiest option is to issue 10 year bonds to the banks for part of the Rs60,000 crore write-off, and ask them to absorb the balance all by themselves. For the banks, it is not that bad a deal if a major part of the outstanding amounts are indeed bad loans as made out to be. They can probably absorb most of their own share of the write-offs through the bad debt provisions they have already made. For the rest, they will get the government bonds. Unlike the oil companies where the principal business bears the brunt of subsidy costs, farm loans are only a part of the overall business portfolio of banks.  Therefore, the banks will not be as badly hit as the oil companies that are struggling to find resources to make capital investments - because of the subsidy burden. 

Even then, it is bad governance to force the banks to share the costs of such loan waivers even if such loans have already become bad. Normally, banks should book losses when loans become unrecoverable. But, in the case of farm loans, most banks would not be offering such loans if the government doesn't force them to. When that is the case, in the fairness of things, the government should fully underwrite all potential losses as well.

Opening a Pandora's Box

The real risk of this ill-advised political move to write-off farm loans is that it opens up a very convenient option for future governments. There will be nothing to prevent governments from writing off farm loans every five years, just ahead of general elections. The government of the day need not find any resources to pay for such profligacy, all it has to do is issue some bonds and ask the banks to pay for the rest!

Worse still, with every such write off, the expectations and demands for such hand outs will increase. If it is Rs60,000 crore now, it will be double that sum for the next instalment. Chidambaram has already paved the way for this by increasing the farm loan target for the next year to Rs2.8 lakh crore and by declaring that all farmers who have their debt written off will be eligible for fresh loans.

Nobody can blame farmers if they start believing that they can take bank loans, which they will never have to pay. This will lead to even more rural indebtedness, as people will take farm loans and divert for other uses. And if sometime in the future, public debt rises to unsustainable levels and make it impossible for the government to finance the write-offs through bonds and is forced to stop the gravy train, it will be nothing short of a disaster for the farm sector. 

Subsidies and loan write-offs are not the solutions to revive our farm sector; they will only make the crisis even worse. There are not many who understand this better than Chidambaram and it is disappointing to see him taking this populist path. These subsidies, market support and price controls have made our farms inefficient and less capable of competing in a free market environment. So, when the country is forced to open up our economy and allow increased imports, these farmers struggle. Had they been encouraged to build their efficiencies, rather than continuously seek payouts from the state, this country would already have become one of the biggest exporters of farm produce. Instead, we are reduced to importing wheat when prices are going through the roof!