Budget has opened a Pandora's Box

A few years ago, while delivering the Palkhivala Memorial Lecture  in Mumbai on  the then Finance Minister Jaswant Singh's Budget, P Chidambaram made the perceptive comment that it was the most unfunded budget in the country's history. There was no provision in the Annual Financial Statement on many new items of expenditure.

Now, ironically, it is the turn of Yashwant Sinha to point out how Chidambaram's budget is silent on expenditure on such proposals as debt waiver! Any issue of bonds to banks by way of compensation for debt waiver and relief, especially when staggered over three years, will put them in the same predicament as the oil marketing companies burdened with similar IOUs.

The bonds are not likely to qualify for investments to meet the Statutory Liquidity Ratio. In case of depreciation in their values, the banks will face the same problems they experienced a few years ago in adhering to prudential norms.

The difficulties are cropping up at a time when the system is in transition to Basel-II norms. There is an ominous suggestion in some official quarters that banks that have already made provisions for the overdues of farm loans may not be given the compensation. It will be unfair to them. The overdue loans will still remain part of the gross non-performing assets of the institutions, reflecting on their soundness.

The loan waiver does not solve the problem of farmer distress. The inequity in the definition of marginal or small farmers based only on cultivated holding is obvious.

According to the budget document, a marginal farmer is one with a holding up to one hectare and a small farmer is one with  holdings between one and two hectares.

A farmer with, say, five hectares of rain-fed land in Pali Marwar in Rajasthan is economically in no better condition than one with two hectares with assured irrigation families in  Ludhiana in  the Punjab. But the former will not be eligible for the waiver.

The need for adopting an income criterion for defining the size of farms was discussed in detail in the Reserve Bank of India's Report on the Seventh Follow-Up Rural Credit Survey entitled "The Small Farmers - A Field Study (1967-69)" with which this writer was associated. The definition adopted in the budget was perhaps for administrative convenience.

According to one estimate, nearly a half of the farmers are indebted to private credit agencies. In Vidarbha, about one-fifth of those who committed suicides had no access to institutional finance. Thus the official scheme covering only institutional credit is likely to create heartburn among those not entitled to waiver.

There is likely to be a demand that there should be institutional refinancing of farmers indebted to private agencies so that their interest burden can be reduced. Given its commitment to financial inclusion, the government may agree and direct NABARD to do the needful in the matter.

One does not understand the rationale for the debt relief announced for farmers other than the marginal and small ones, a euphemism for medium and large cultivators, through a one-time settlement  by writing off 25 per cent of their overdues.

According to the budget, it will imply a cost to the government of Rs 10,000 crore (Rs 100 billion). It is a well-known fact that many of these "other farmers" are also moneylenders and they take advantage of the arbitrage profits available from borrowing from a bank or cooperative at a low rate and lending to small farmers.

The question of farmer suicides and debt relief has been in the news for several months. Did the government ever try to find out the profiles of the affected farmers and how many were large ones?

Prima facie, the benefit is available, irrespective of whether the crops failed. It is not administratively difficult to determine areas of agricultural distress based on the crop-cutting surveys conducted for the estimation of output and confine waiver to those areas.

Gone are the days when, for example, the land revenue remission was announced based on a limit related to the annawari estimates of the crop output in states like Tamil Nadu.

It is now across the board. So even a farmer with irrigated lands and no decline in output gets the advantage pari passu with his poorer dry farmer.

The total financial involvement of the government is likely to be more than the estimated amount of Rs 60,000 crore (Rs 600 billion) if those who repaid loans demand successfully with political support that the money should be returned to them and they should not be penalised for honesty.

There is also likely to be a demand for waivers from small and medium industries since many of them have suffered from the fall in export orders due to the appreciation of the rupee.