Budget 2008-09 and the Social Sector

 

CONTEXT

The latest budget has been hailed as yet another cosmetic attempt in achieving the Common Minimum Programme. Despite this government's promise to increase social sector spending, there has been little serious efforts at doing so with the overall allocation to education and health standing at about half the target levels of 6% and 2-3% of GDP respectively. Even the loan waiver to small distressed farmers has been written off as a poll gimmick and a mere re-adjustment of finances. It has ignored the useful suggestions of the Radhakrishna Committee that sought to make profound changes to the agricultural credit market.

 

Discussions on the Budget proposals begin in the Parliament from tomorrow.

 

                KEY ASPECTS

 

1. Education and health sector spending

    

2. The Agricultural Crisis and the Loan waiver package offered to small and medium farmers. What are the various criticism advanced agains it?

    

 

 

REQUESTED BY an MP from Orissa

 

 

DUE DATE: March 12, 2008

 

 

RESPONSE

 

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I. EDUCATION AND HEALTH SECTOR SPENDING

 

 

EDUCATION

 

HEALTH

 

 

 

II. THE AGRICULTURAL CRISIS AND THE LOAN WAIVER PACKAGE 

 

Agricultural Crisis: Salient Points

 

1. Dates back to the late ’80s, accentuated in the ’90s, with a fiscal crunch (Centre plus states) leading to the collapse of research and extension services, spliced with regulatory collapse leading to the proliferation of counterfeit seeds and fertilisers.

2. Public investments in agriculture has been declining. 

3. Erratic power supply was combined with hike in power costs

4. Declining Ground Water and insufficient expansion of irrigation.

5. Problem of Rural Credit

6. Crop Insurance does not seem to work

7. Higher number of intermediaries in the system which results in lesser revenues for the farmers, inspite of higher food prices. Disintermediation show gains of 25-30% for the farmer.

 

Farmers' Suicides

 

The National Crimes Records Bureau reports that there are some 17,060 farmers' suicides in a year.

 

 

• Suicides are linked to exposure to risk consequent on commercialisation and diversification
• Close to 150,000 Indian farmers committed suicide in nine years from 1997 to 2005. Maharashtra, for which data exists from 1995, is by far the worst state in the country. Farm suicides there more than trebled from 1083 in 1995 to 3926 in 2005.  (National Crime Records Bureau data)
• During the period 2001-05, 86,922 farmers committed suicide. Of these, 54 per cent were from the four states of Andhra Pradesh, Karnataka, Kerala and Maharashtra.
• Indebtedness is one of the main factors resulting in suicides, but it is not the only one. Farmers face multiple risks that reinforce each other. In addition to the weather related uncertainties, the farmer is also faced with market, technology, spurious inputs and credit related vulnerabilities.

 

 

"Overall, there exists since the mid-90s, an acute agrarian crisis. That's across the country. In the Big Four (Maharashtra, AP, Karnataka and MP) and some other States, specific factors compound the problem. These are zones of highly diversified, commercialised agriculture. Cash crops dominate. (And to a lesser extent, coarse cereals.) Water stress has been a common feature - and problems with land and water have worsened as state investment in agriculture disappears. Cultivation costs have shot up in these high input zones, with some inputs seeing cost hikes of several hundred per cent. The lack of regulation of these and other aspects of agriculture have sharpened those problems. Meanwhile, prices have crashed, as in the case of cotton, due to massive U.S.-EU subsidies to their growers. Or due to price rigging with the tightening grip of large corporations over the trade in agricultural commodities."  Professor K. Nagaraj, Madras Institute of Development Studies (MIDS) as quoted in The Hindu (http://www.indiatogether.org/2007/nov/psa-mids1.htm)

 

WAIVER OF LOANS

 

In the Budget 2008-09, the Finance Minister announced a Rs. 60,000 crore loan waiver package. The salient features of this package are:

 

1. All agricultural loans given by institutional agencies upto March 31, 2007 and overdue on December 31, 2007 are covered under the loan waiver.

2. For marginal and small farmers (upto 2 hectares), there will be a complete waiver of all loans overdue on December 31, 2007.

3. For other farmers, there will be a One Time Settlement Scheme (OTS), which will provide a rebate of 25% against a repayment of the remaining.

4. Rescheduled and restructured loans, under earlier relief packages, will also be eligible for the waiver as above.

 

Criticisms of the Package

 

The loan waiver package has been subject to criticism by various experts on a number of counts.

 

1. Exclusion of a large number of farmers

 

On the impact of the loan waiver, there are differing views. The Finance Minister says that three crore small and marginal farmers and above one crore other farmers will benefit from the entire package (40 million farmers).

 

The most serious problem with the current package is that famers outside the instituational credit sytem are excluded. The current debt waiver on only linked to the formal credit system, which means access by relatively rich farmers, thus reinforcing inequality. Poorer farmers continue to wallow in the clutches of money-lenders. The Radhakrishna Committee Report on Rural Indebtedness pointed out that only 48.6 per cent of farmer households are indebted and only 57.7 per cent of debt (there is an alternate figure of 51.3 per cent) is formal. That is, only 28.4 per cent of farmers are indebted to the institutional system. Further, 74 per cent of debt from non-institutional sources (money-lenders) is at rates in excess of 20 per cent, sometimes 30 per cent. The loan waiver does not address this porblem.

 

One of the recommmendations of the Radhakrishna Committee was to create a "Moneylenders Debt Redemption Fund" through which institutional agencies could lender credit for longer periods in order that the farmer would repay his loan to the moneylender and gain access to institutional credit. This has not been taken up.

 

Second, even if one were looking at those within the institutional credit system, Surjit Bhalla points out that only a fraction of farmers have bank loans, and only 5% of these are overdue. Going by this calculation, overdues should exist for only 2.25 million farmers. This number is much smaller than the 40 million projected by the finance minister.

 

Third, Swaminathan Aiyer says that the cap of two hectares of land excludes a large number of households. Rural India is full of family holdings rather than individual holdings, and family holdings are typically larger than two hectares even for the poorer farmers. Bibek Debroy is of the opinion that a uniform exemption for farmers holding 2 hectares is problematic without taking into account agro-climatic region, state of irrigation and use of land.

  

2. Preference for distress of farmers as against other rural labourers

 

Bibek Debroy points out that there are some 100 million landless labourers in rural India. The current package looks only at the distress of the farmers, and thus excludes the indebtedness and poverty of non-farmers. Swaminathan Aiyer also says that the poorest rural folk are the landless labourers, who get neither farm loans nor waivers, and thus continue to exist in vicious cycles of poverty.  

 

3. Affects the culture of repayment; Discourages expansion of agricultural credit

 

The Johl Committee which suggested measures to assist distressed farmers has clearly indicated that an across the board waiver of loans is not an appropriate solution to the chronic problem of farmers' distress because it vitiates the repayment culture and spoils the mutual confidence between borrowers and lenders. U.R. Bhat similarly points out that the debt waiver strikes at the root of the credit culture because borrowers would henceforth hesitate to repay loans in the continued expectation of such schemes. Infact, the Johl Committee and the Radhakrishna Committee both point out that although credit is an important issue, it is not the sole reason for the cause of farmers' distress, and their suicides.

 

Second, it punishes honest and conscientious farmers who have exerted themselves in repaying overdue loans.

 

Third, and most importantly, the consequence of a deterioration in the repayment culture would adversely affect the provision of agricultural credit by the banking system.

 

4. Does not take into account regional disparities

 

Bibek Debroy points out the current package is discriminatory as it does not take into account the rural distress of areas in the Centre, East and Northeast regions of India.

 

5. Exclusion of other types of loans by farmers

 

The Radhakrishna Committee points out that almost 40% of the loans taken by farmers are for non-productive purposes. Poorer farmers may borrow for smoothening consumption, for livestock, implements, marriages and medical treatment. However, the current debt waiver is only for crop loans, and will thus exclude a large variety of loans.

 

 

 

 

Additional Reading

 Radhakrishna Committee on Rural Indebtedness report.pdf

http://www.cbgaindia.org/pdfs/cbga_response_to_budget_08_09.pdf

 

References

 

http://www.indianexpress.com/story/282303.html

http://www.indianexpress.com/story/282789.html

http://www.indiatogether.org/2007/nov/psa-mids1.htm

http://economictimes.indiatimes.com/Opinion/Editorials/The_debt_waiver_conundrum/articleshow/msid-2850666,curpg-2.cms

http://timesofindia.indiatimes.com/S_A_Aiyar_Loan_waiver_Poll_winner/articleshow/2848567.cms