FROM BUSINESS WORLD OF 11 JULY 2006
Short-sighted generosity
Four weeks ago, the Prime Minister visited villages in
Vidarbha where farmers had committed suicide. After hearing the stories of
their distress from those that were left behind, he announced a relief package
amounting to Rs 3750 crore – Rs 712 crore in interest to be written off, Rs
1275 crore in fresh credit, and the rest to fund irrigation, water harvesting
and seed improvement.
This practice of throwing money
at problems is so common amongst politicians that it hardly attracts comment.
They buy votes with taxpayers’ money. Politicians all over the world do it; if
they do it somewhat more egregiously in India, that is what Indian democracy is
about.
But when it is adopted by a Prime
Minister who once was a renowned economist, it evokes questions about which
turban he is wearing. For he cannot be unaware of the incentive effects of his
actions. If some farmers are forgiven their interest liabilities, they will ask
why it should not happen again. Others will ask why they do not deserve the
same bounty. Many borrowers will stop paying interest, hoping that when they
are asked to pay, they will make up some hard-luck story and get by. Giving
fresh loans to defaulters has similar incentive effects. Having been rewarded
once for defaulting, they will expect further rewards. And borrowers with an
impeccable record will ask themselves why they should pay when others do not.
The cost is initially borne by banks, and when they cannot bear it any more,
the central government pumps taxpayers’ money into them.
To a soft-hearted politician, the
above considerations will seem devoid of pity. How can one just stand by and
watch when farmers are committing suicide? For every suicide there are a
hundred farmers going through unbearable financial distress. Such crises are
what politics is supposed to address. The press is a spoilt, hypercritical
brat. It will criticize any meritorious act. But its attention span is short;
soon something else will catch its attention, and it will forget the farmers.
What is sad and surprising in
this affair, is that although the Prime Minister himself once wrote theses and
papers analysing economic problems, he has no interest in analyses of the
problems he has to deal with. The problem is not confined to Vidarbha, but is
endemic in the Deccan trap, consisting of inland Maharashtra, Andhra and
Karnataka. The rainfall in this region is insufficient for rice or sugar cane.
So farmers in these areas are confined to dry crops. Amongst these crops, the
dry foodgrain crops lost out over the years when cheap – some would say
subsidized – wheat and rice came to be sold all over the country; today, jowar,
bajra and ragi are largely forgotten. When these crops became uneconomic, the
farmers of the Deccan Trap turned to cotton.
Cotton is subject to the triple
risk of rainfall, pests and prices. Pests can be tackled, but pesticides are
expensive; and more recently, expensive high-yield seeds have become available.
Both require investment. It should ideally come as risk capital. But farmers
cannot set up companies or raise equity. So the capital has come as
fixed-interest loans. Banks have from time to time been forced to lend; but
they do not like lending to cotton farmers on account of the risk; so the
lending business has been largely in the hands of private money-lenders. There
are laws going back to late nineteenth century against exploiting farmers. But
the returns are high enough to cover the risk, so moneylending has continued to
flourish.
The Maharashtra government has
tried to protect farmers against price fluctuations by guaranteed purchases.
But it did not want a situation in which it had to buy all the cotton that was
offered in years when prices were low, and get none when prices were high. So
it has instituted monopoly procurement – with the result that Maharashtra
farmers miss out on price booms. Its monopoly procurement scheme is extremely
unpopular, not least because of delayed payments and corruption; farmers
routinely smuggle cotton out of Maharashtra.
Manmohan Singh may be a master of
economics, but he is a prisoner of politics. He can do nothing to dismantle
Maharashtra’s monopoly procurement scheme. He cannot force the Maharashtra
government to act against politically powerful moneylenders; an MLA from
Buldana is reputed to be Vidarbha’s most prominent agricultural moneylender.
And the Prime Minister is too conscientious to abandon his job as long as he
thinks he has a chance of doing something good for his country – or at any rate
of preventing another politician from doing harm. So the only option he sees is
to throw money at problems, knowing full well that money nourishes and
multiplies problems.
