indianexpress.com :: That old market for votes

That old market for votes

Jaithirth Rao

Posted online: Thursday, March 06, 2008 at 2251 hrs IST

Sixty thousand crores means a lot of money even in these ‘inflated’ times. In the pursuit of the votes of farmers and in order to steal the thunder from the raucous opposition, our finance minister has announced a sweeping one-time waiver of loans given to farmers by our commercial and cooperative banks. Constitutional lawyers may quibble as to whether this attempt to discriminate in favour of one group of citizens (and therefore by definition against other groups) is correct or not. Why, for instance, should carpenters or potters or blacksmiths have to repay their loans, when farmers are exempt? These lawyers are unlikely to get a hearing in the courts. The current dispensation is comfortable with different income tax rates for men and women, violating the principle that it is the income that is being taxed and not the individual. In this ambience, discrimination in favour of farmers is likely to meet with judicial approbation just as it has won the near unanimous approval of the legislature. After all, can it not be argued that Gandhi loved farmers, Nehru loved farmers, Indira loved farmers, Rajiv loved farmers and so on? And lest it be unnoticed by northerners of the unlettered persuasion, the Tamil poet Tiruvalluvar loved farmers! In short, there are solid historical and literary reasons to be pro-farmer, not just electoral ones.

In the midst of all the tumult and the shouting, the focus has been almost entirely on the farmer. Some of my unscrupulous non-farmer friends are planning to get certificates from the friendly, persuasive and eminently reasonable (to money, that is) Registrar of Certificates (surely such a bureaucrat should be brought into existence if he or she does not already exist?) that they are in fact farmers and have always been farmers. They are hoping that even though they have missed the Rs 60,000 crore gift, they will make themselves eligible for any largesse that the finance minister may bestow on farmers in the future.

The real beneficiaries of this supremely pro-farmer move, one could argue, are not the farmers but the banks. Here they are saddled with loans that they could not collect anyway, and in place of these ‘non-performing’ assets (bankers love euphemisms) the banks will receive securities where the principal and the interest are fully guaranteed by the Sovereign Secular Socialist Republic of India. Bankers must be happy and with good reason. In the past, when rich businessmen who were friends (cronies?) of politicians could not or would not repay their loans, elaborate rituals like ‘restructuring’ and ‘references to BIFR’ were the order of the day. As the old saying goes, if you borrow a thousand rupees and default, the bank troubles you. If you borrow a million rupees and default, you trouble the bank. Since loans to individual farmers were small, by definition the banks troubled them and as there was no magical BIFR, loans stubbornly remained on stressed balance sheets. Now that worry is gone at one stroke.

Adherents of free markets can draw comfort from the fact that even in that Mecca of free markets, the US of A, not so long ago, the federal government bailed out

Savings and Loans Associations (whose owners were usually generous with election campaign contributions) with hundreds of billions of dollars of taxpayer funds in order to help them cover up the bad loans they had made. What is a mere Rs 60,000 crore in comparison?

What is it about banks that gives them the right to make poor decisions and have taxpayers bail them out? Economists will tell you that there is an ‘externality’ associated with banks. And for those of you who would like to understand this expression, please note that externalities refer to broader consequences beyond those affecting immediate economic actors. The argument goes that if a factory gets into financial trouble, some employees, suppliers and creditors suffer. But if a bank gets into trouble, people lose their faith in the larger financial system; money flows get impeded and the whole economy could move towards a recession, maybe even a depression (the Wall Street Crash of 1929 is attributed to the failure of governments to control bank failures). Hence, while we can in good conscience allow factories to go bust, we must keep using government funds to ‘recapitalise’ (another euphemism for a grant) banks. Our finance minister has recapitalised banks to the extent of Rs 60,000 crore. He could have injected the amount as capital. The banks would then have been duty-bound to continue to try to collect on their loans. Now he has saved them the legal and administrative costs of collection and positioned the move as a benefit to farmers, not to bankers (who the public does not like anyway!).

Some years ago, another finance minister belonging to another political party bailed out the UTI primarily because of externality considerations. If the government-run UTI were to be seen as going under, the negative consequences could have engulfed the economy. The case with agricultural loans is similar. Over the past 40 years, many of the accumulated problems on bank balance sheets have been attributed to ‘directed’ lending, agricultural overdues, etc. This problem needed attending anyway and sooner or later the government would have had to act. By publicly telling farmers that they need not pay what in any case they could not or would not pay, the finance minister has converted a problem into an electoral opportunity. He is in the market for votes. He must be congratulated on killing two birds with one stone.

There is a danger that all citizens may try to get themselves classified as farmers or that left-handers, short (sorry, vertically challenged) people and women (the current beneficiaries of political correctness) may ask for loan waivers. We will have to cross that bridge at the right time. In the meantime, it is in order for banks to make risky loans to these and other borrowers, knowing full well that considerations of ‘externality’ will always help bail them out!

The writer divides his time between Mumbai and Bangalore jerry.rao@expressindia.com

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That old market for votes Jaithirth Rao Posted online: Thursday, March 06, 2008 at 2251 hrs IST Sixty thousand crores means a lot of money even in these ‘inflated’ times. In the pursuit of the votes of farmers and in order to steal the thunder from the raucous opposition, our finance minister has announced a sweeping one-time waiver of loans given to farmers by our commercial and cooperative banks. Constitutional lawyers may quibble as to whether this attempt to discriminate in favour of one group of citizens (and therefore by definition against other groups) is correct or not. Why, for instance, should carpenters or potters or blacksmiths have to repay their loans, when farmers are exempt? These lawyers are unlikely to get a hearing in the courts. The current dispensation is comfortable with different income tax rates for men and women, violating the principle that it is the income that is being taxed and not the individual. In this ambience, discrimination in favour of farmers is likely to meet with judicial approbation just as it has won the near unanimous approval of the legislature. After all, can it not be argued that Gandhi loved farmers, Nehru loved farmers, Indira loved farmers, Rajiv loved farmers and so on? And lest it be unnoticed by northerners of the unlettered persuasion, the Tamil poet Tiruvalluvar loved farmers! In short, there are solid historical and literary reasons to be pro-farmer, not just electoral ones. In the midst of all the tumult and the shouting, the focus has been almost entirely on the farmer. Some of my unscrupulous non-farmer friends are planning to get certificates from the friendly, persuasive and eminently reasonable (to money, that is) Registrar of Certificates (surely such a bureaucrat should be brought into existence if he or she does not already exist?) that they are in fact farmers and have always been farmers. They are hoping that even though they have missed the Rs 60,000 crore gift, they will make themselves eligible for any largesse that the finance minister may bestow on farmers in the future. The real beneficiaries of this supremely pro-farmer move, one could argue, are not the farmers but the banks. Here they are saddled with loans that they could not collect anyway, and in place of these ‘non-performing’ assets (bankers love euphemisms) the banks will receive securities where the principal and the interest are fully guaranteed by the Sovereign Secular Socialist Republic of India. Bankers must be happy and with good reason. In the past, when rich businessmen who were friends (cronies?) of politicians could not or would not repay their loans, elaborate rituals like ‘restructuring’ and ‘references to BIFR’ were the order of the day. As the old saying goes, if you borrow a thousand rupees and default, the bank troubles you. If you borrow a million rupees and default, you trouble the bank. Since loans to individual farmers were small, by definition the banks troubled them and as there was no magical BIFR, loans stubbornly remained on stressed balance sheets. Now that worry is gone at one stroke. Adherents of free markets can draw comfort from the fact that even in that Mecca of free markets, the US of A, not so long ago, the federal government bailed out Savings and Loans Associations (whose owners were usually generous with election campaign contributions) with hundreds of billions of dollars of taxpayer funds in order to help them cover up the bad loans they had made. What is a mere Rs 60,000 crore in comparison? What is it about banks that gives them the right to make poor decisions and have taxpayers bail them out? Economists will tell you that there is an ‘externality’ associated with banks. And for those of you who would like to understand this expression, please note that externalities refer to broader consequences beyond those affecting immediate economic actors. The argument goes that if a factory gets into financial trouble, some employees, suppliers and creditors suffer. But if a bank gets into trouble, people lose their faith in the larger financial system; money flows get impeded and the whole economy could move towards a recession, maybe even a depression (the Wall Street Crash of 1929 is attributed to the failure of governments to control bank failures). Hence, while we can in good conscience allow factories to go bust, we must keep using government funds to ‘recapitalise’ (another euphemism for a grant) banks. Our finance minister has recapitalised banks to the extent of Rs 60,000 crore. He could have injected the amount as capital. The banks would then have been duty-bound to continue to try to collect on their loans. Now he has saved them the legal and administrative costs of collection and positioned the move as a benefit to farmers, not to bankers (who the public does not like anyway!). Some years ago, another finance minister belonging to another political party bailed out the UTI primarily because of externality considerations. If the government-run UTI were to be seen as going under, the negative consequences could have engulfed the economy. The case with agricultural loans is similar. Over the past 40 years, many of the accumulated problems on bank balance sheets have been attributed to ‘directed’ lending, agricultural overdues, etc. This problem needed attending anyway and sooner or later the government would have had to act. By publicly telling farmers that they need not pay what in any case they could not or would not pay, the finance minister has converted a problem into an electoral opportunity. He is in the market for votes. He must be congratulated on killing two birds with one stone. There is a danger that all citizens may try to get themselves classified as farmers or that left-handers, short (sorry, vertically challenged) people and women (the current beneficiaries of political correctness) may ask for loan waivers. We will have to cross that bridge at the right time. In the meantime, it is in order for banks to make risky loans to these and other borrowers, knowing full well that considerations of ‘externality’ will always help bail them out! The writer divides his time between Mumbai and Bangalore jerry.rao@expressindia.com