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Tuesday, March 18, 2008

Waiver of Mass Debt (WMD)

This blog entry is by Vijay Mahajan of BASIX.

Iraq was attacked by the US and the UK on the basis of a fictional threat - WMD - weapons of mass destruction. We have seen the results of that lie, with shock and awe. India's WMD is less costly - Rs 60,000 crore, or only $15 billion - but is based on similar half-baked analysis of half-truths, and well designed to benefit those behind it - in our case Pawar-ful large commercial farmers.

As per the National Sample Survey, 59th Round, 2004-05, over half, or 51.4% of the farmer households in the country did not access credit, either from institutional or non-institutional sources. Further, despite the vast network of bank branches, only 27% of total farm households had any loans from formal sources (of which one-third also borrow from informal sources), while 73% did not. Among the marginal farmer category, as many as 80% did not have any borrowing from formal sources.

So the FM and the Agriculture Minister must have known in advance that their generosity will only cover the upper quartile of farmers. Yet, if we go by the details, only those whose bank loans were overdue on Dec 31, would get a waiver. So a big grape farmer in Nasik who had a bumper crop but was politically aware, so did not repay his loan, will get a waiver of Rs 1 lakh while a poor rainfed farmer in Vidarbha who has sold his less than normal yield cotton crop to the state monopoly cotton federation, at a lower than market price, will be deemed to have repaid his Rs 15000 loan from the proceeds that he has yet to receive, and will not get the waiver.

There is no fig leaf to this pro big farmer loan waiver, as can be seen by RBI's clarification that not only crop loans but also term loans for tractors, poultry farms etc will be covered by the waiver. To minimize backlash from those who did not get the waiver, in AP, the Chief Minister has additionally declared a 10% bonus payment to all farmers who sell their produce through regulated market yards - once again, the larger farmers.

Apart from the gross inequity in the name of small farmers, the loan waiver is particularly inept as it completely fails to address the underlying causes of the Indian agrarian crisis, including -

  1. Dwindling size of land holdings;
  2. Low percentage of irrigation, even protective irrigation; and where there was irrigation, tapering yields due to long years of mis-fertilisation and increasing level of pesticide resistance.
  3. In rainfed areas, no measures for coping with recurrent drought, no significant varietal improvements, nor any agricultural guidance to farmers.
  4. Increases in input costs, coupled with lower relative prices for produce, and price fluctuation, has meant that agriculture is not very profitable even for commercial farmers. For small farmers, with imputed wages for family labour, farming does not even break even.

The same Rs 60,000 crore could have been used to drought-proof 60 million ha of dryland @ Rs 10000 per ha, which would permanently secure the livelihoods of at least 3 crore of our poorer, farmers in rainfed areas. Dozens of successful examples exist, of the rehabilitation of natural watersheds and traditional water storage structures, by NGOs and government agencies. Part of the funds could also be used to rehabilitate the dilapidated canal irrigation systems, conditional on the states switching to participatory irrigation management (PIM).

Even if one were to accept that the loan waiver was aimed at gaining electoral advantage, it could have been done much more equitably and would have fetched more votes.

Recognising that the debt burden of small and marginal farmers is more from moneylenders and traders, a waiver should have been given for both bank and moneylender/trader loans. Given the difficulty of verifying these, the waiver could have been limited to Rs 5000 per ha for farmers with irrigation, and Rs 2500 per ha to rainfed farmers, with a cap of Rs 10,000 per farmer in both cases. Additional amounts from informal lenders could have been swapped for much lower cost bank loans, as has been tried in Andhra Pradesh by the "total financial inclusion" program of the Indira Kranti Patham project.

Further, to prevent leakage, the money could be credited to the bank accounts of farmers. This would also have incentivised banks to open "no-frills" accounts for 5 crore farmers who don't have bank accounts, as per the recently adopted national financial inclusion plan.

Rough calculations show that this alternate method would have benefited 10 crore farmers, about thrice the number likely to be covered at the moment.

The one mystery is - why did not the Left argue in favour of a more equitable waiver? Have they lost interest in the agrarian vote bank after Nandigram? Or is it a deal which we will understand many years later?


  1. Vijay did you deliberately forgot to add , it messed up the micro finance institution & promote fiscal indiscipline.

    What could have been the best use of the dole will always hold a divided opinon.

    you could have been more forthright , as how it impacts MFIs, who have been charging high internest rates as the local zamindars. Do you fear MFIs will be the next target for such populist measures. ?

  2. Good one. However asking if the left has forgotten after Nandigram is not a true one.



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