As the Bharatiya Janata Party and the rest of the National Democratic Alliance (NDA) swing into the 2004 elections, feeling good, perhaps great, the danger lurks of awful hangovers that invariably imperil too much partying. Jaswant Singh has had a pretty good scorecard with his interim budget, playing the fiscal game with a straight bat, while holding out promises galore in the next innings. Though it is hazard untold to be certain of electoral outcomes, it has been something of a foregone conclusion for some time now, that the NDA will indeed have a second innings. The elections in December, the parlous state of the Opposition and the body language on both sides just reinforce these expectations.

Once the elections are over, and it is back to the office, there will be plenty of pressure to deliver. And on many important issues, the directions indicated by the interim budget are true dead ends. Take the case of credit for agriculture. The minister?s contention is that banks do not lend enough to agriculture. They did not do that when the rate was fixed a little over PLR (prime lending rate); things did not change when the ceiling rate was brought down to PLR, nor apparently when it was further reduced to 9 per cent. Now the promise is to persuade banks to bring the rate down further. This is an exercise in unreason.

Ponder a while. Banks lend term (that is, medium and long term) to government at 5 per cent. They lend term to top quality corporates at rates ranging from 6.5 to 8 per cent. They lend to homeowners and car buyers at 9 to 11 per cent (on internal rate of return basis). But, according to government, they do not lend at 14 or 11 or 9 per cent to farmers. If lending to agriculture was a comparable activity, banks would surely have fallen over themselves to lend at the higher available rates to agriculture, rather than compete amongst themselves to beat down the rates at which they lend to corporates, homeowners, car buyers and indeed to government.

The fact of the matter is that lending to agriculture and very small businesses are a different ball game. Commercial banks are organisationally not well suited to this kind of business. The cost of field investigation and monitoring is high; as is the loan losses due to defaults or delays in payment. Furthermore, the opportunity cost of credit for a farmer is very high ? the rate at which he borrows from the unorganised credit market is typically 30 per cent and higher and that too for very short tenures of six months. He would be grateful if credit was available at, say, 20 per cent and the re-payment was over a couple of years. That is precisely the kind of terms with which Grameen Bank and other micro-credit agencies have succeeded in Bangladesh and elsewhere ? a history that is now 25 years old.

What has been missing in India are appropriate institutions that will take credit into the rural countryside. Institutions that will not only disburse loans but recover them too, institutions that will pay for themselves ? pay the salaries of their employees and other overheads. The big commercial banks do not fit the description of such institutions ? small and medium non-bank finance companies probably do. Empirical evidence shows that the administrative costs of small finance companies ? those who successfully finance scooters, tractors, operate in small towns and semi-urban areas are relatively high, ranging from 8 to 12 per cent of their average assets. As in other things in life, there is nothing like a free lunch.

Suppose for a moment that banks were indeed efficient organisations for moving credit into agriculture. Then if adequate credit was not flowing, and there was an interest cap (as there is), the rational policy response would have been to increase the incentive to the bank of lending, by raising the rates. So why should the honourable finance minister persist with arguing that banks indeed are the best way to push credit. And why should he choose to anyway do the counter-intuitive by seeking to reduce the ceiling rate further?

Election-time politics is perhaps the right answer. Readers might recollect that during the debate on the Opposition?s No Confidence motion against the government late last summer, a ?charge? indeed was levelled in the classic logic of socialism and control raj. Namely, that the government was elitist as interest rates on ?luxuries?, like cars and homes, had been ?brought down?, but not that for crop loans. Near impossible to explain the logic of markets and banking at election time, that there is a huge difference between banks responding to market opportunities and administrative measures, like interest rate ceilings. In any case, if the party, which gave a grateful country economic reform in the first place, does not today understand it, there is little hope of trying to explain to the masses just now. So one can understand the motivations behind the several steps to lower the ceiling rate.

After the elections are done, and the new government formed, the problem of credit for rural borrowers and small businesses will not go away. It has to be dealt with in a creative fashion committed to sustainable outcomes and not be hostage to political hypocrisy. This holds also true for fertiliser subsidy, which is an unmitigated waste of the taxpayers? money. And food subsidy needs an overhaul ? a strengthening of the Antyodaya and similar schemes, and a phasing out of the disastrous combination of ?maximum? support prices and large-scale ?procurement? by the Food Corporation. Market signals have been suppressed in agriculture for too long and this has introduced what are plainly inefficient use of the farmers? hard labour and Nature?s bountiful resources.

The change in gears will not be easy, but if India is to continue to shine and the pall be not cast, many deeds will have to be done. There are too many schools without teachers or textbooks, too little sanitation, too little drinking water, too many roads and homes that are not there. Space must be found in government expenditures ? both in the Centre and in the states ? to fund these important deficits in social and physical infrastructure. The legacy of fiscal waste of years past, and expired slogans must provide that space.

The author is economic advisor to ICRA (Investment Information and Credit Rating Agency)