Whats wrong with the loan waiver

The biggest news about the budget has been the Rs 60000 crores loan waiver. It's a brave move, we are told. The government, of course, would like us to believe that it is a silver bullet that will solve the problem of farmer suicides. But will it?

I'm no economist. But based on what I've been reading for the last few days, there are some things that I have tried to get a grip of on the subject. Now I'm not much concerned by the ideological argument that government should not interfere or that loan waivers encourage financial irresponsibility. If people are driven to commit suicide, I think we can forgo those considerations if it that will stop them from doing so. Besides, such freebies are given quite often to corporates in the form of SEZs, tax reliefs and the like. So the ideological opposition is moot. What I'm concerned with, is whether this waiver will actually serve its purpose.

To begin with, the loan waiver is only for those farmers who have 2 hectares. Those who have more have the option of having 25% of the loan waived if they pay the remaining 75%. That's where the trouble begins. Not all crops are the same. They don't have the same requirements of soil nutrients, land size etc. Nor do they have the same price. Some require more land, some less. For example, in Vidarbha, has been one of the most infamous for farmer suicides, average land holding is 3.5Ha.

But the waiver takes none of this into account and seems to assume that 2Ha of cotton is equal to 2Ha of sugarcane is equal to 2Ha of apples.. As P Sainath further explains in this article, even the timing is going to hit the farmers:

The cut-off date of March 31, 2007 works against even the small group of Vidarbha farmers who do benefit. Loans in the cotton regions are taken between April and June. In the cane growing regions, they are taken between January and March. This means the Vidarbha farmer has one less year of loans waived than the others.

Besides, there are a number of farmers all across India who are below the 2Ha limit, but not facing a crisis, such as in Kerala, as the article also points out. These people will also benefit from this waiver. Some of you may wonder why this is a problem. It is because, as Mohammad Yunus (Grameen Bank founder, micro-credit pioneer and Nobel Peace Price laureate) suggests, mixing the needy with not-so-needy within a programme leads to the not-so-needy driving the needy out of the benefits of the deal. In other words, the not-so-needy tend to dominate the benefits.

What's worse is the fact that loans from private moneylenders are not covered in this waiver. Why is this a bad thing? Because over three-fourths of people in MH alone are under loans from private moneylenders, as this report prepared by the Tata Institute of Social Sciences and tabled before the MH High Court, says.

The farmers took their first loan from banks (banks gave loan only once, with a further loan possible only after repayment of the outstanding loan). The later loans were from private parties to repay the bank loan (default of which would result in attachment of the land or mortgaged house). Even for those with an ability to get loan from the formal sector, access to informal sector loans was indispensable. Thus, over 75% of the farmers had loan commitments to non- formal sources.

And now comes probably the most dangerous aspect of the whole issue. On one hand we have a loan waiver that does not target the most important source of loans ie private loans, and on the other, we have the startling news that one rural commercial bank has been closed every day for the last 15 years.

The Reserve Bank of India’s Handbook of Statistics on the Indian Economy (2006-07) shows there were 30,639 rural branches of SCBs in 2007. That is, 4,750 less than the number in 1993. In other words, an average of 26 bank branches shut down each month, or one every working day.

However, branches in metros shot up from 5,753 to 11,826 in the same period. In other urban centres, the number climbed from 8,562 to 12,792 in this period, while also going up in semi-urban locations from 11,356 to 16,214.

And the rate, as that article further explains, was the highest in 2006, which was after the TISS report I mentioned earlier.

So putting these pieces together, we see that, rural commercial banks (whose loans are covered) have been closing down at an alarming rate while private moneylenders have been entering to fill their space, thereby worsening matters. This does not betray the intentions of a government serious about solving the problem of farmer suicides.

In short, the loan waiver suffers from a problem of targeting: its audience has not been targeted and nor has its timing.

Some people claim that, bad as it may be, it still is better than nothing. That is missing the point since, after all, the argument is not that nothing would be better. The point is that this loan waiver is not the best usage of the money the government has on its hands.

Farmer suicides is a complex crisis arising out of many factors. A research on these factors, and identifying which factors are most dominant in which areas would have yielded a policy which addressed specifically those points of concern. A loan waiver with terms tailored to meet the differing requirements, or maybe different smaller loan waivers, one for each concern area, would have proved a more effective use of taxpayer money.

The solution being offered by this blanket loan waiver is akin to a doctor who blindly gives Crocin to any and every patient who comes to him, ignoring the fact that the patient may actually in need of a tetanus injection or an antibiotic, or may even be having a fracture, all cases in which Crocin is hardly of any use.

In dealing with any complex problem, identification of its causes is the key and addressing those causes is how one proceeds. That is the practice used in engineering; it is the same practice that is lacking in this loan waiver.

As I said, I'm no economist. But as an engineer, as a citizen and a taxpayer, I refuse to believe that the best economists and researchers cannot come up with a solution that addresses the specifics of the factors causing suicides and utilizes public money in a more effective way. One size does not fit all