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Good money after bad

The farm loan waiver was bound to run into trouble given that it makes for poor economics and now poor politics. For a government facing a general election in about a year’s time, this is really bad news.
Hindustan Times | By HT Correspondent, New Delhi
UPDATED ON MAR 06, 2013 10:58 PM IST

The UPA’s huge farm loan waiver, as fiscal hawks saw it, was always going to be about “bad economics”. The Comptroller and Auditor General’s criticism of the scheme now makes it a political failure too. For a government facing a general election in about a year’s time, this is really bad news.

The UPA, as part of its budget proposals in 2008-09, had announced a “debt waiver and relief package”, of around Rs. 71,000 crore. The very idea was to spread cheer all around. The scheme sought to write off, partly or wholly, the loans of 42 million largely small-time farmers. Debt forgiveness has two main objectives.

The social goal is to promote “well-being”. The financial objective, in this case, was to make “blacklisted” farmers eligible for “fresh loans” to get going again.

As with most of the government’s well-intentioned schemes, this one too has not delivered on its promise. One in five farmers who got the benefit was ineligible for it.

Providing fresh loans to blacklisted farmers only promotes financial irresponsibility. The waiver turned a large amount of private debt into public debt. If the government cannot pay off its own loans, many might ask, whom does it turn to for funds. Why, it goes back to the people and makes them pay through higher taxes and other means.

Yet, a lifeline was desperately needed. Millions of farmers had fallen on hard times. The crisis was triggering off suicides. Small farmers, those owning less than a hectare (2.5 acres), face bigger challenges: they spend more on cultivation, but earn less, unable to match the scales of big farms. By many international standards, debt relief isn’t such a dirty word.

President Clinton had signed a historic legislation for $435m (about Rs. 2,600 crore) in debt relief for HIPC nations (Heavily Indebted Poor Countries). But generosity gone to waste only strengthens the case against freebies. India’s inability to manage or finance large schemes efficiently could endanger future proposals.

The failure this time lies in a shocking structural disconnect. India’s financial agents, employed to execute the farm loan waiver, simply did not seem to share the sense of national urgency for financial discipline. And so another scheme fell through the cracks.

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