FM Delivers an Agrarian Budget... or Is It?

Keeping everybody happy is a tough ask. And if you are a Finance Minister presenting his last budget of the term in a run up to the elections, the ask is much tougher! But our Finance Minister has been able to please the masses. Increase in income tax slab limits for the middle class, write-off of loans to small farmers, more allocation to education sector, and much more… Good show Mr Finance Minister!

One thing that bothers me in this “rosy” scenario is the decision to write-off Rs 600 billion worth of loans to farmers. I am as concerned about the appalling agrarian situation as anybody else in the country, and fully realize that India’s all-inclusive growth cannot afford to bypass agrarian reforms, but based on my limited knowledge of economics, loan waivers are never a great idea for the following reasons:

- This does not create any discipline or financial prudence in the farmer community. I sympathize with farmers who are going through this hellish cycle of bad crops-more loans-loan servicing-requirement of loans-etc., but this move will just clean up the farmers’ balance sheets and encourage them to go to the banks for more loans with as much uncertainty around possibly another bad season (cause we have not addressed the root cause), and possibly another waiver!
- Waivers dis-incentivize farmers who have serviced their loans. What can the government expect the next time around farmers avail loans from banks? There will be more defaulters in anticipation of another such waiver!
- Banks cannot be made vehicles for social dole-outs. Though this waiver will allow banks to clean-up their balance sheets, it is generally a bad idea to treat business establishments as means of social reforms.
- This does not address a bigger problem of private unorganized money lending at much higher rates. This does not provide relief to a zillion other farmers who are in the private (unorganized) lending net.

Though it is much easier to sit on the sidelines and criticize (and that is precisely what I am doing) and provide unsolicited “arm-chair” consulting, and social reforms have much wider implications and several constraints than my “naïve” (I don’t claim to understand the nuances of economics!) mind can appreciate and evaluate, here are a few things that the finance minister could have considered:

- Providing waivers for only “really” marginal farmers, and for the rest just restructuring loans to make servicing easier, or just waiving off a percentage of the loans rather than straight-write-off.
- Investing more (out of the Rs 600 billion waiver) on creating long term sustainable environment in farm lending – such as trying to bring discipline in un-organized lending sector, better structuring in loans provided by nationalized banks, more avenues for micro-credit, etc.
- Improving ground-level situation for farmers in terms of technology support, providing better seeds, enabling them to directly sell in free market, water management, other infrastructure, etc. For instance, allocation of Rs 750 million towards setting up mobile soil testing facilities is a positive step in this direction.

And, who is financing this waiver? It will come from projected higher tax receipts and non-tax sources such as disinvestments. So this will come out of our pockets and at the expense of further “more meaningful” development in the country.

I am happy for the farmers, but I strongly feel that the finance minister has just postponed the problem for a few more years till it bites back yet another government.