On farm loan waiver package

We all have seen the details of the farm loan waiver package announced by the Finance Minister in his budget speech on 29^th February.

Some more details are:

There are four crore small and marginal farmers who are unable to repay their crop loans to the banks.

It will be financed out of the fisc through a combination of cash and bonds. The fisc is expected find the resources from its overflowing tax receipts and disinvestment proceeds.

The last major write-off was in 1990.

Why is a waiver bad or why it misses the point?

A complete waiver vitiates the lending climate and does damage to farm and loan discipline. It penalizes borrowers who have honoured their loan commitments and creates a moral hazard since farmer-borrowers are likely to assume future dues will also be written off.

Small farmers face two main challenges: meeting their input needs and dealing with the weather risks to their crops. Addressing these challenges is not on the radar of the government.

Another basic problem farmers face is getting a fair price for their produce. Nothing is uttered about this also in this budget.

The announcement by the finance minister seems to have got its definition of small farmer all wrong. Marginal farmers (less than 1 hectare) and small farmers (1 to 2 hectares) is an incorrect classification. It should have taken the irrigated and un-irrigated areas and arid and semi-arid areas into account while classifying farmers. Without this, a large measure of the farmers in distress will remain untouched by the waiver.

The scheme misses the point that majority of the farmers are in the clutches of village money lenders. The scheme doesn’t touch them at all.

What suggestions could you give?

The long term solution is to make farming profitable. The way ahead in this direction is – investment in irrigation and roads, allowing farmers to sell outside mandis and provision of information on seeds and agricultural practices.

Redefine small and marginal farmers duly taking into account the nature or type of their farm.

Rein in the village money lender by fixing a cap on the amount of interest that he can charge on the loans given by him.

Related links:

A very good debate that appeared in today’s ET on the issue can be found here.

Any debate about alleviating farm distress cannot be complete without inputs from the doyen of Indian agriculture – M.S. Swaminathan. Read his excellent article that appeared in today’s Hindu here.

Budget Related Questions answered

Hi friends,

I received an email asking me to clarify certain things about the recent budget statement and figures. I am doing my best to answer the queries. The para having an * before it is the query and the para that follows it without an * is my answer. Here I go:

This is with reference to blog post (dt. 01.03.2008). Here you have posted a table depicting various aggregates of Budget 2008.
I had the following queries -

* Point 3 talks about non - tax revenue to the central govt. Could you provide me with an indicative break up of this figure.

If you are looking for actual figures, I recommend that you look at Annual Financial Statement on Receipts. It is just a four page document.

But to give an idea what comprises non-tax revenue, it includes thinks like fiscal services (coinage and mint services), interest and dividend income or profits made by government.

* Similarly, Point 6 is about other capital receipts, so it refers to 'grants' which the central govt. receives or it is pointing at some other source.

Capital receipts includes Public Debt (Internal and External), Recoveries of loans and advances and others. The internal debt comprises of Treasury Bill auctions, Ways and Means advances, Receipts from Market Stabilization Scheme auctions etc. The 'grants' that you are referring to perhaps fall under the 'others' category.

* Point 9 is an aggregate of non-plan expenditure, here I am surprised to see such exorbitant amounts placed under Interest payments, if they are of this magnitude and are foreseeable - then why not classify them under plan expenditure. Further, does Point 14 include any interest payout?

Though your query makes sense to me, I think the reason for it lies in the simple fact that Plan is for a five year period. Whereas Government keeps mobilizing money at times much more than what is budgeted by way of loans depending on circumstances. This makes it hard for it to really plan the interest outgo in advance, over a five year period. That's why it can't plan for such interest outgo. In any case what you plan for interest outgo during a five year plan is separate and will find a mention under the Plan Expenditure head.

* Point 17 (total revenue expenditure) - why doesn't it include Point 11 as interest payment is also of revenue nature only.
Row 10 already includes in it row 11 figures. Read the "of which" in row 10? That means that row 11 is already included.