The first lesson of economics is scarcity while the first lesson of politics is to disregard the lesson in economics. This holds true for the Indian National Congress that has always focused on petty short-term political interests while governing public policy rather than taking a long-term policy vision. The recent elections have yet again demonstrated the same mentality of the Congress Party.
Over the last couple of state elections, one thing has become apparent and that is the continuous poll promise of the Congress Party of farm loan waivers. It is interesting to note that the Congress had announced a similar farm loan waiver in 2008 which led it to a victory in the 2009 elections and thus, Congress is convinced that a farm loan waiver can bring it back to power. But there are a lot of reasons why farm loan waivers are just political gimmicks and it has been observed time and again that farm loan waivers have absolutely no impact on the farmers.
The bulk of India’s farmers have limited access to formal sources of credit and as a result of this, they resort to borrowing money from non-institutional sources of credit such as money lenders. All forms of farm loan waivers would be able to target only institutional sources of credit and thus, at least 60% of farmers are excluded from the scheme in the first place. Another important fact is that those farmers who have access to institutional credit are affluent farmers, so these waivers do tend to sharpen rural inequality as the affluent farmers get these benefits while the marginal farmer continues to remain as impoverished as before.
Besides that, another important factor is the opportunity cost of such farm loan waivers. Consider you have a 100 Rupees and you can distribute it amongst 2 groups. Now I can either spend this money on both the groups or spend it on just one. Farm loan waivers are spending money on just one of the groups, and that too on the affluent group. The point being made with this example is that the government has only a limited amount of money that it can use for the benefit of people. When it undertakes a farm loan waiver, the spending by state on education, irrigation and other social sectors are bound to reduce to accommodate for such expenses. Thus, while the benefit of the scheme reaches only a few affluent farmers, it comes at the cost of potential spending for the entire rural sector altogether.
Another important issue is of the inflationary impact that these farm loan waivers can have as they are revenue expense which results in consumption spending. With around a majority of Indian farmers as net buyers of food grains, by imposing inflation tax onto them, we make the small farmer pay for the rich farmers’ farm loan waiver. So, in effect, it is the landless farmer who pays for the farm loan waivers and that’s why these waivers never succeed in improving the livelihoods of the rural poor. This is precisely why the Prime Minister adopted a crop insurance approach rather than the blatant repeated “loan-waiver” approach by the Congress and the results of Crop Insurance indicate that it is much more effective in stabilizing the weather-induced volatility in farm incomes.
The recent example of only 800 farmers benefiting from Karnataka’s farm loan waiver indicates how the Congress has gone back to its age-old policy of “photo-op policies” rather than sound policy-making that will have a deep impact in improving the rural economy. With precious funds being diverted in Madhya Pradesh to finance such a waiver, one must ask the impact that allocating the funds to irrigation would have had onto the lives of the marginalized farmers.
As is the case, for a nice headline and instant gratification, the Congress has chosen to increase rural inequality by waiving off the loans of affluent farmers and making the marginalized farmer pay for such a waiver. Such is their admiration for India’s farmers and the poor.