India: Rural Loan Waiver or Moral Hazard?
For almost a decade or so, the news of suicides by debt-ridden farmers has been constantly hogging the headlines of Indian newspapers. These suicides have been taking place largely in relatively more advanced states like Punjab,
Ever since the beginning of economic reforms, based on Washington Consensus, the troubles in rural areas have been increasing. They are reflected, among others, in growing debt burdens on farmers, leading to incidents of suicides by them. Keeping in view likely disastrous political consequences, the finance minister of the Congress-led United Progressive Alliance (UPA) government of
According to the latest data, this scheme is to bring relief from debt burden to as many as 36.9 million marginal and small farmers and 5.97 million ‘other farmers’. The government has defined a marginal farmer as one whose landholding is less than one hectare and a small farmer as one who cultivates one to two hectares of land. ‘Other farmer’ is one that possesses more than two hectares of land.
Under the proposed scheme, all outstanding loans of marginal and small farmers will be written off, no matter whether they are short term crop loans or borrowings for investment purposes. Roughly speaking, in most states, marginal and small farmers account for 70 to 94 per cent of the entire farming community. The ‘other farmers’ will get relief only up to a particular proportion of their total debt burdens. Initially, this scheme was to cost the public exchequer Rs 600,000 million, but now it is estimated to be around Rs 716,800 million.
Even though, people at large have welcomed the scheme, some economists whose thing has been more influenced by Uncle Miltie (Milton Friedman) are unhappy with it. Among them is Raghuram Rajan. He was born in
This philosophy is reflected in the “Draft Report of the High Level Committee on Financial sector Reforms,” headed by him. This committee, set up by the Planning Commission of India, is to submit its final report shortly. One of the recommendations of this Committee is privatization of all nationalized commercial banks!
Coming to rural loan waiver scheme, Rajan is vehemently opposed to it. He thinks, this move is disastrous and will spoil
Another well-known economist, A. Vaidyanathan, writing in The Hindu (March 6) had expressed almost the identical views. To quote:”Experience shows that waivers encouraged borrowers to presume that they can sooner or later get away without repaying loans. It reinforces the culture of willful default, which has resulted in huge over dues and defaults in all segments of organized financial institutions. The deterioration in the cooperative credit system is, in large measure, due to the conscious state policy of interference in the grant and recovery of loans.” To him, loan waiver scheme was against the very spirit of economic reforms.
The line of thinking thus evinced by Rajan, Vaidyanathan and the like of them is not new. Every student of economics knows it by ‘Moral Hazard’. This term dates back to the 17th century and was frequently used by English insurance companies towards the last quarter of the 19th century. It denoted fraud or immoral behavior on the part of the insured party. Some researchers hold that ‘moral’ actually meant ‘subjective’ without ethical considerations.
It means, if an insurance company is liberal or lax in enforcing the terms and conditions agreed upon between the insurer and the insured, the latter may default in payment of the premium or, if his car is insured, he may not take care while parking or locking it. In driving too, he may be careless because he is confident that the insurer will compensate him for the loss without much fuss. On the contrary, if the insurance company is strict in enforcing the terms and conditions agreed upon, the insured will be careful and the company will not suffer.
Rajan, Vaidyanathan and others of their tribe forget that many a time a farmer is not able to repay his loans because of circumstances beyond his control. If one looks back, one finds a number of instances. To begin with, in the 1860s when American civil war began the supply of raw cotton from the
Similarly, in the early 1930s, agricultural prices in
While Rajan and company are unhappy with the scheme of rural loan waiver, they have not uttered a single word about the phenomenon of non-performing assets of banks, which has arisen because
Lastly, these economists are oblivious of the political implications of sufferings of indebted farmers, leading to suicides. In