Kicking off his 2,500 kilometer ‘Kisan Mahayatra’ in poll bound Uttar Pradesh on Tuesday, Congress Vice President, Rahul Gandhi played the trump card that most politicians typically rely on to outsmart their rivals in wooing the agrarian communities — promise of loan waivers and cut in electricity Bills.
Gandhi boasted that the UPA-government waived off Rs 70,000-crore loans to farmers across the country and asked if the Narendra Modi-government can do the same for UP farmers. “Like we (UPA government) waived Rs 70,000 crore, you should also do for farmers. Modiji should waive loans of farmers of Uttar Pradesh and of the country," the 46-year-old Congress leader was quoted as saying by news agency Press Trust of India.
For a moment, let’s ignore the real intention behind Gadhi’s statement. It could have either come from his genuine concern for the struggling farmers in UP or was simply an idea born in the heads of Congress’ backroom strategists to woo the UP farmer. No matter what, by giving a promise of loan waivers, Gandhi is in fact doing a disservice to those very poor farmers (by destroying their credit culture), the banks (putting their loans at risk) which have been lending to them and, thus doing great harm to the economy.
Missing the target
Those who advised Gandhi to use the loan waiver plank to woo the UP farmer need to introspect, since such gimmicks have hardly translated in the past to votes, especially in states like UP. Even if one assumes that loan waivers are done in UP and electricity bills are cut, most likely, the whole episode will turn out to be another version of the ‘Cot tragedy’ seen in Gandhi’s inaugural rally in UP, where the big ‘takeaway’ for the audience from Rahul-rally was the ‘cots’ themselves, not the idea Gandhi wished to convey through his ‘Khat sabha’ model. The simple reason is that the mob will always endorse you if you offer freebies, but the loyalty thus gained doesn’t last.
If Gandhi is serious about the welfare of farmers, the Congress VP should do away with the ‘loan waiver’ plank since it actually hurts the farmer ultimately. It works this way: The very announcement of loan waivers destroys the credit culture of the borrowers and has a wider cascading impact across that particular region. Past experience shows this begins to happen on Day One of the announcement. Even the honest borrowers, who have been paying his dues diligently, will feel fooled and stop paying back, waiting for the waiver to happen at some point.
Such deterioration in the credit culture will immediately punch holes in the agriculture loan portfolio of banks, in turn, making them stop all fresh funding to everyone who have defaulted on payments. Already farm loan NPAs (non-performing assets) are a big chunk of bad loans for many banks. According to senior bankers, this has happened when the UPA announced Rs 70,000 crore loan waiver in 2008 and when the Andhra, Telangana governments announced loan waivers to farmers in 2014. Thus ultimately, it harms both the bank and the borrower. It takes years to clear the mess and reinstate the trust between the two.
Loan waivers ineffective
The point is beyond temporary relief, loan waivers do not help farmer.
In other words, even if one assumes that the loan waiver indeed reaches the intended beneficiary — the poor farmer (in many cases it doesn’t happen in reality), the good news for him ends right there. After that, he is practically a loan defaulter in the eyes of his lenders. The next time the farmer walks into a bank seeking a fresh loan, which he will for the sake of continuing his farming, the lender wouldn’t offer a fresh loan looking at his past credit history. This would apply to all farmers, whose names are mentioned in the loan waiver list.
In fact, the Reserve Bank of India (RBI) has highlighted the perils of loan waivers in the past. Speaking at an event in Udaipur, former RBI governor, Raghuram Rajan asked an important question.
“How effective these debt waivers have been? In fact the studies that we have typically show that they have been ineffective. In fact they have constrained the credit flow post waiver to the farmers."
The worst part is that once the banking system is shut for the farmer, he will then be forced to seek the assistance of the private moneylender, paying an astronomical rate of interest and thus putting his life’s savings, land and honor at risk. But the farmer, unfortunately, doesn’t realise this risk because it is human nature to grab freebies without a second thought.
In the process even the good borrowers who used to pay back on time get into the bad list. When the Andhra/ Telengana loan waiver announcement had happened, rating agencies had warned about the serious repercussions such actions can have on the system. "These schemes seem to have yielded electoral gains, similar announcements could be made in other states as well. The most vulnerable would be states in which elections are nearing," India Ratings had warned then.
This is precisely what has happened in the Rahul Gandhi rally.
Playing the populist card
Rahul’s reasoning that if corporate loans can be waived off, why cannot the same be done with the farmer loans lacks logic. One mistake cannot correct another. If corporates have fooled the banking system and if bankers are party to it, the remedy lies in investigation, legal action and recovery of loans — not compensating it with another bigger mistake. Rahul’s logic is wrong here and is counter productive for the system.
If the idea is to help the farmer, it should be done through assisting him with measures that do not harm him ultimately. The minimum support price is an idea worth debating in this context. Also, fresh funds can be made available on easier terms to the deserving farmers through nodal agencies such as National Bank for Agriculture and Rural Development. Already, under current norms, banks too have to lend at 18 percent of their priority sector loans to the farmer.
Secondly, Gandhi’s promise to halve the electricity Bills too lacks sense. In UP, the timely availability of power is the bigger issue farmers face, more than the cost of the power. Halving the power bills will only help to break the back of the state electricity board that is already fighting a financial crisis. Lack of availability of power in UP is a severe problem and doesn’t confine to the farming community.
According to this June, 2016 Hindustan Times report, UP will be the country’s fourth most power-deficient state only after Bihar, Assam and Jammu & Kashmir. While the state will experience an average demand for 16,000 MW during the year, it will be able to meet only 14,454 MW demand, thus registering a shortfall of 1,546 MW which will be as high as 9.7 percent of the total demand, the report said. That tells us that the problem in the state is more on account of power deficiency, not the cost of power. Gandhi should have spoken on the core issue, but he chose to play the populist card.
To understand the futility of his exercise, Gandhi needs to only remember that if farm loan waiver was the miracle cure the Congress party needed to win votes, it wouldn’t have ended up with less than 30 seats in the 2012 UP polls and then lost terribly in the 2014 Lok Sabha polls. Even then, Congress leaders had spoken of the 2008 farm loan waiver in political rallies. Gandhi needs to rethink on his poll strategy.