The UPA government?s largesse to farmers was the touchstone of Budget 2008-09. The unprecedented waiver of all overdue loans, worth an estimated Rs 60,000 crore, has even been dubbed as good politics in an election year. Some commentators argue that loan waivers are an effective form of benevolence because the entire cash reaches ? or has already reached ? the intended beneficiaries in full, unlike leaky poverty relief schemes, and are more likely to be put to worthwhile use than other handouts. Give the bureaucracy money to uplift the poor, and it vanishes. Give it to the poor, and they might blow it. Write off bank-vetted loans taken for earnest purposes, goes the reasoning, and you subsidise good work. And agriculture, left out of the liberalisation bonanza, is a sector that badly needs support. For all the lofty talk about comparitive advantage and world trade, most big countries remain paranoid about foreign dependency for food. Ask the US or EU about their subsidy regimes.
Yet, much depends on the details. Data for outstanding agriculture loans across states shows that only a small share of Indian farmers? debts will be written off. By RBI data, commercial banks had Rs 1,91,973 crore in farm loans on their books as on March 31, 2007. Such banks typically account for only about 60% of all loans provided by the three entities for which loan waivers were announced ? scheduled commercial banks, regional rural banks and cooperative credit institutions. Total agriculture credit provided by all three would be closer to Rs 3,82,846 crore. The figure of Rs 60,000 crore that the government promises to provide is an estimate of loans that have turned bad. That is, loans on which interest or capital paybacks are overdue, and are therefore not being serviced. Since such loans to ?distressed farmers? represent only 16% of total farm credit, what the rest of the loan-takers think of the waiver could be a source of trouble. Will their propensity to default willfully rise? This is the ?moral hazard? problem that economists warn of. Or will their sense of honour keep them servicing their loans? This is what many assume in their understanding of Indian rural social set-ups. As for lending a helping hand to the downtrodden, it is always easier if there is broad support for such charity at the ground level where it is to be done. In other words, the waiver?s success could depend on the rural response in a wider social context. Non-defaulting farmers should approve, rather than feel resentful, and achieving this outcome takes an entirely different effort. Also, there are millions of farmers who have loans from informal sources. An NSSO report points out that only about half of all farmers source credit from banks and cooperative credit institutions, while the rest depend on moneylenders, traders and so on. How will they react? Sulkily, for sure, though one could argue that they would also feel the urge to switch to formal funding from now on, even if the banking sector?s reach is still inadequate. Even by geography, there are skews. South Indian states account for a disproportionately high share of rural credit, given their modest contribution to agriculture output. The waiver announcement, by itself, hardly means very much in terms of popular support for the UPA.
