Setting the wrong example

The phenomenal farm loan waiver of Rs 36,359 crores in Uttar Pradesh is smart politics, but not necessarily good economics. While farmers need all the support society can give to ensure food sufficiency, loan waivers and NPAs aren’t the best way, even though we owe farmers a debt. There are ways of giving and monitoring money for inputs and crop insurance, besides setting a generous procurement price so that fiscal discipline isn’t destroyed. The assurance of politically-inspired loan waivers at periodic intervals, specially around elections, may prompt even honest farmers to pad up their margins by welshing on loans.

This exercise won’t stop with UP, though all politicians have welcomed the relief for farmers. The waiver will raise the issue of it being invidious as it’s restricted to a populous state, rendered even more politically important by voting for the party in power at the Centre. The Madras high court ruled on waiving of crop loans that cost the exchequer nearly Rs 2,000 crores more. While the ruling restored equity, making the waiver applicable to all farmers regardless of landholding size, the bench also suggested the Centre chip in to help the state tide over its worst drought in 140 years. Does the Centre need court orders to do this even in such an extreme emergency?

What happens to banks and cooperative institutions, already smarting under bad loans and NPAs? This has to take into account the economy’s overall health. UP could find financial relief in floating bonds. The point to note is that society can support its farmers without risking its banking system.