There are moments in history when the boot is on the other foot and it is time to turn things on their head so that lessons can be learnt and, perhaps, taught as well. The past month has seen an interesting twist of events in the world economy, India included, which throw up questions that touch upon issues that India had to face when it embarked on its economic reforms in 1991. Surprisingly, the answers for the same questions seem to have changed somewhere along the way. But more on that later.
The Centre’s reported proposal to waive repayment of agricultural loans to help debt-stricken farmers is one that smacks of populism
as the UPA government heads into an election year after the Union Budget set to be unveiled on February 29. The proposal, which could involve a fiscal package of anything between Rs 30,000 crore and Rs 90,000 crore, would presumably help millions of poor farmers in this vast country in which despite the dizzying growth of malls and information technology parks, three-quarters of a billion-plus citizens live in rural areas, most of them dependent on agriculture.
Fiscal fundamentalists who are worried that an agricultural relief package might run up more red ink on the government’s deficit books than is becoming are bound to criticise such a proposal as and when it is revealed. Opposition parties, on their part, may run it down in their own peculiar way. Conservative bankers could also be expected to frown upon the proposal as loan waivers tend to shake the credibility of the banking system. Some would say — perhaps rightly — that loan waivers send wrong messages to borrowers as it gives them a licence to default.
In the 1980s, the then Prime Minister Rajiv Gandhi’s government was criticised for the ‘loan melas’ under which public sector banks gave out loans to the poor in formal events during which political leaders posed for photo ops. In somewhat of a bout of feudal hangover, disbursement of loans by public sector banks are still seen as an act of largesse rather than as commercial transactions. The fact that they may help in electoral victories — or cause defeats — definitely aid the reincarnation of feudal largesse in democratic disguise. The essential conflict here arises out of a system of political largesse conflicting with one of the economic autonomy of the market.
About two decades ago, when Devi Lal rode to power on the promise of waiving farm loans from repayment, he was the devil incarnate for bankers, political critics as well as fiscal puritans. That was a different India — short of funds in the government and embracing slowly but steadily the philosophy of market-friendly policies in which the State would disentangle itself from interfering in the public sector and strive for fiscal prudence.
The International Monetary Fund (IMF) was the champion of fiscal discipline as India went in for an IMF loan to enable macroeconomic stability after the nation faced a balance of payments crisis in 1991. As the belt tightened and the financial sector headed for reforms under the recommendations of the M. Narasimham Committee set up by the then Finance Minister Manmohan Singh, farm loan waivers amounted to financial anarchy in the eyes of the reformers.
Things have indeed come a full circle now. India is flush with foreign exchange reserves that are nearing the $ 300 billion mark and the government is mulling over the setting up of a sovereign wealth fund to manage an excess of liquid funds in the market. Fiscal deficit and inflation are less of a problem. Perhaps, an agricultural loan relief package is more affordable now than it was when Devi Lal championed it.
But defaults are not new to the Indian economy. In the case of industrial loans, debt is simply rescheduled or adjusted through the banking system’s internal method of ‘provisioning’ under which capital is infused to make up for ‘non-performing assets’ — or bad loans. Like they say, when you owe a hundred dollars, it is your problem; when you owe a billion dollars, it is the banker’s problem.
So, is the Indian farmer not entitled to his share of an industrial perk? While we engage on that question, it would pay to look West. The US is in the throes of a possible recession, thanks to the ‘sub-prime’ crisis spurred by home loans given to borrowers with poor credit records — the ‘sub-prime’ borrowers. With losses that could add up to $ 400 billion, these loans would have to be probably written off wholesale, with a fresh infusion of capital coming to the rescue of some of Wall Street’s biggest banks.
The US Congress itself has voted for tax rebates and fiscal stimuli amounting to more than $ 152 billion to help revive the economy. Suddenly, loan waivers and State support for the economy, a very socialist and Indian thing as it were in the 1980s, seem to describe the current American economy. As if that was not enough, the managing director of the IMF, which has for decades been the champion of fiscal austerity, has come out in favour of fiscal spending to boost growth. Those who wanted New Delhi to tighten its belt in 1991 are busy telling some nations they would do well to loosen their own. “Unless the situation improves, the fiscal authorities in countries with low fiscal risks should prepare to exploit the headroom for timely and targeted fiscal stimulus,” said the IMF MD, Dominique Strauss-Kahn, in notes for a speech to economic researchers.
And so it pays to ask: if the US can cope with bad debt from those who buy large houses and if the IMF can waive austerity in favour of fiscal stimuli, is not the Indian government entitled to package its own relief for people that we could call ‘sub-prime farmers’?
Debt-stricken farmers in Andhra Pradesh, Karnataka, Maharashtra and Punjab have resorted to suicides in the past few years. While the causes, details and impulses for these may vary, it is clear that indebted farmers, apart from needing a better crop insurance regime and adequate infrastructure, are certainly entitled to some relief. After all, India has seen amnesty to tax evaders at least twice in the recent past. Thus, even if one could call it an election year stunt, debt waiver for farmers under a policy of ‘inclusiveness’ might lead to at least a minor surge in consumer spending in the rural areas.
However, the government might do that with some sobering thoughts. In Britain on Sunday, the government nationalised the cash-strapped Northern Rock bank hit indirectly by the sub-prime mess. The boot is on the other foot as Asia surges while the West takes steps that smack of Nehruvian socialism. Surely, a reversal of economic reform is not what one hopes for in India. The Middle Path should be the way to go.
Narayanan Madhavan is Associate Editor, Hindustan Times.