YV Reddy’s warning on farm doles: Biggest enemy of Indian farmer is the power-hungry politician flashing freebies

Former Reserve Bank of India (RBI) governor YV Reddy finds the ongoing spree on farm sector freebies a ‘disturbing trend’, which, he said, can cause ‘irreversible fiscal deterioration’ and generate conflicts between both Centre and states. Reddy even pitched for an alternative for farm sector freebies in the form of an agricultural distress fund contributed by both the states and Centre, rather than the ongoing measure of arbitrary scheme announcements. Reddy is the latest expert joining the list of economists and central bankers warning against the dangerous politics of populism using taxpayers’ money. Reddy’s comments are significant in the context of a series of announcements on farm sector doles from both the Congress party and the ruling Bharatiya Janata Party-led government ahead of the 2019 general elections. [caption id=“attachment_6015571” align=“alignleft” width=“380”] Representational image. Reuters[/caption] While Congress president Rahul Gandhi announced his party’s intention to offer minimum income to all if voted to power in 2019 and made farm loan waivers happen in most of the Congress-ruled states, the BJP followed it up with a Budget announcement to give an income support of Rs 6,000 for every small and marginal farmer in a scheme based on a similar one announced in Telangana. No political party can miss the warnings Reddy has issued, the main aspect of which is the recurring nature of the fiscal burden on Centre should it go for minimum income scheme, which is estimated to be around Rs 70,000 crore during fiscal 2020. In other words, this will put enormous tax burden on taxpaying middle-income class. Such a fiscal burden will have catastrophic impact on government finances already grappling with major income-revenue mismatch. Rating agencies like Fitch Ratings have already warned about India’s weak fiscal position. India’s the sovereign rating profile would be evaluated based on the medium-term outlook in the post-election Budget, the agency recently said. Already India has missed the Fiscal Responsibility and Budget Management (FRBM) road map on fiscal deficit targets for the three consecutive years. This year too, the target has been revised to 3.4 percent from 3.3 percent earlier.

A report by India Ratings had shown that the farm debt waivers announced by the five major states — Uttar Pradesh, Punjab, Maharashtra, Rajasthan and Karnataka — together will balloon the combined fiscal deficit by Rs 1,07,700 crore or 0.65 percent of GDP this financial year. This sort of degradation in the state’s finances on account of populist policies has been cautioned by the Reserve Bank of India (RBI) in its recent annual report.

In its report titled, State Finances: A Study of Budgets, the RBI revised estimate for GFD-GDP for FY18 to 3.1 percent as against 2.6 percent earlier. “With states continuing announcements and roll-out of farm loan waivers , the budgeted gross fiscal deficit (GFD) could be at risk, and the additional borrowing requirement could produce a concomitant impact on the already elevated borrowing yields,” the RBI said in its report. But, the risk of farm sector doles doesn’t end with fiscal mess, as Reddy says. It extends to Centre-state spats as most states already have some kind of support schemes for the economically weaker sections and such schemes are considered to be vital for vote bank politics of regional parties as well. Who would want to give away the political credit that easily? Then comes the actual impact of farm loan waiver on farmers. Does it really benefit the needy. As this writer  argued in the previous articles, the waiver carrot doesn’t really help. Waivers extended so far by governments (whoever is in power) have only offered temporary relief to the farmer. At the time of the next agricultural season, he goes in for another debt trap if there are no rains. Naturally, loan waivers can be a recurring solution every year.

On the other hand, loan waivers deal a body blow to banks. The moment a farm loan waiver is announced, even the honest ones stop repayments in the hope that their liabilities will be included in the waiver package too. This causes a spike in the non-performing asset (NPA) levels. In the aftermath of every loan waiver announcement, this has been observed.

Beyond a short-term period, freebies will not serve farmers well. In fact it leads them to recurring problems. Reddy’s idea of an agricultural distress fund is worth discussing, but isn’t a new idea as such. What is required here is an overhauling of farm sector infrastructure and policies. The dangerous politics of populism, as experts like Reddy alluding to, can inflict irrevocable damages on the larger economy and is actually the biggest enemy of the farmer.