HVK Archives: Irrelevant subsidies
Irrelevant subsidies - The Economic Times
Editorial
()
4 September 1996
Title : Irrelevant subsidies
Author : Editorial
Publication : The Economic Times
Date : September 4, 1996
The agricultural credit system is in a mess. Regional
rural banks, credit co-ops and land development banks are
in varying stages of decay and bankruptcy. The main
reason is that successive loan write-offs have encouraged
wilful default, and recoveries are pathetic (as low as 30
per cent in many cases). Any farmer who repays a loan
looks an utter fool when his neighbour, who has repaid
nothing, gets a write-off. So non-payment is rewarded
instead of being penalised and has become high fashion.
The write-off of farm loans by the Janata Dal government
in 1990 led to the collapse of what little discipline
existed earlier. Instead of learning from the episode,
the party's election manifesto this year again promised a
further write-off. Prime Minister Deve Gowda recently
announced a write-off for farmers in Kashmir, and some
fear he may do the same for UP farmers before elections
in that state. All studies show that the bulk of loans
go to richer farmers. If these repaid old loans, more
credit would be available for poorer farmers who have not
got credit so far. But massive default now means that
credit is no longer recycled, and the money stays with
the original borrowers. From the viewpoint of small
farmers, nothing is more important than to break the
vicious cycle of write-offs and wilful default, and this
is where agriculture minister Chaturanan Mishra needs to
focus.
Instead, he wants to waste more money of bank depositors
subsidising bank loans to small and marginal farmers.
Past experience shows that IRDP loans, ostensibly for
those below the poverty line, go in large measure to the
better-off farmers. A multitude of studies show that
small farmers will happily pay commercial interest rates
(interest costs are a tiny proportion of crop production
costs), and their main problem is access to credit. The
Grameen Bank in Bangladesh has proved conclusively that
poor people can service commercial rates of interest with
very low default rates. In India too, self-help savings
and loans groups exist in thousands of villages, pooling
their savings and lending these to members at 20 per cent
interest. All these organisations have a much better
rate of recovery than government banks with subsidised
credit. What we really need is discipline that penalises
those who fail to repay loans, not irrelevant interest
subsidies which throw good money after bad.
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