The 65,000 crore write off

There was always an expectation that the current budget will definitely look into the issue of farmer loans. Too often have we heard about failed crops and suicides. As Mr Chidambaram said during his budget speech that the country has a deep gratitude towards its farmers. Actually this is true. Do we ever wonder where the sack of potato or onions or chillies are coming from. We just go into the market & expect fresh batches of vegetables/fruits/cereals all the time.

But coming back to the point. Though this was expected to a great deal what was probably not expected was the magnitude of this offer. Rs. 65,000 crores is at any point of time a massive amount of money.

In the short term, there will be a drain on the financial system. As pointed out, it will have an effect on the profitability of all PSU banks particularly in the 4th qtr results of FY 07-08. We have to understand the fact that these loans are assets in the books of the banks against corresponding liabilities which are basically savings & current accounts i.e. our money. Now if the assets vanish ovenight the banks might be under severe liquidity problems. Good thing is that the Government proposes that these right-offs would be compensated by issue of bonds, securities etc. so that the entire effect is not passed on to the Banking system.

Another effect this will have is a dearth of investible money in the hands of the banks. Till the time the bonds are floated the Banks will have less of cash to disburse as loans. This may lead to a demand-supply gap in the short term and the interest rates will probably continue to be high. This will be actually contrary to the expectation of a softening interest regime and may actually contribute to an increase in inflation.

Further, the scheme talks of farmers with a certain cap of land holding. This I believe is the biggest pitfall. The biggest question here is who is going to monitor this aspect. The farmers would probably be at the mercy of local authorities to freeze their holding and there might be a scenario of immense kickbacks in this regard. Also, who is going to stop the big farmers from dissecting their landholding to less than the ceiling limit in the name of family members. In India, unfortunately, money can buy anything. I believe that the administration will be the most challenging aspect of the scheme.

Another point which has not been explored is the loans taken by the farmers from local moneylenders. These are the loans, with exorbitant interest rates, that drive people to take their lives. It's a reality that only a small percentage of farmers take loans from Banks. For most, it's the local moneylender who demand huge interest and heavy collateral from which there is no escape. This segment has not been addressed at all.

Probably from a macro perspective, it would have made more sense that this money be spent on infrastructure - better irrigation, better crop & cultivation technologies, cold freezers etc. This would have resulted in a lasting effect. Because, till the time these things are not in place, the next round of crops would also potentially be at risk of failure and the fresh loans disbursed to the farmers will also be at risk. This will give rise to a vicious cycle. Having said that, the elections are actually not far away and that probably is the biggest reason towards any kind of budget announcement. The infrastructure development may have taken 5-10 years to put in place but by that time there may be a new government who will walk away with the credit. On the other hand, this measure has an immediate impact and will certainly help once elections come around. This I believe is the only negative thing about this entire scheme.

Having said all this, apart from the doubts as expressed above, I am totally for this scheme. I believe any amount of money is worthwhile provided it saves a life. We do owe deep gratitude to our farmers and in a socialist set-up we have to do everything to alleviate their position. There are certain things, we in the city, take for granted. The reality in the villages is very different. "Equitable distribution of wealth" is a word we have been hearing for a long time. This scheme, if administered properly, may go a long way to do that.