PC aims at the Aam Aadmi

The almost last-minute inclusion of the farm loan waiver in the UPA government’s last Union Budget shows that the 'socialist' group in the Congress prevailed over the pro-liberalisation section that included the Prime Minister and the finance minister.

By Paranjoy Guha Thakurta

The decision to waive farm loans worth Rs 60,000 crore in the fifth and last full-fledged Budget of the United Progressive Alliance government goes against the basic tenets of the neo-liberal economic ideology subscribed to by Prime Minister Manmohan Singh and finance minister Palaniappan Chidambaram. Yet political compulsions have ensured that the two had to not only go along with the majority view in the Indian National Congress and the UPA but, irony of ironies, had to become the most vociferous supporters of the loan waiver scheme.

There is evidence to indicate that the loan waiver scheme was inserted into the Budget speech in the final stages of its preparation. The document was printed through the night of February 28 and in the early hours of February 29. Other than the speech of the finance minister, the Budget documents do not make specific mention of the loan waiver scheme, leading the government’s opponents and supporters alike to wonder from where the money to fulfill the promise will come from.

In his interviews to the media after the presentation of the Budget, Chidambaram has stated that banks would be recapitalised to the tune of Rs 60,000 crore for the farm loan write-off programme over a three-year period by, among other things, issuing bonds. He has refused to specify details stating that these would be made public only after these have been formulated, which in turn gives credence to the view that the loan waiver scheme was not well thought through and was announced in a hurry.

When the Prime Minister spoke on television immediately after the Budget was presented, he said the farm loan waiver and loan relief programme would span three years. Many wondered then why the finance minister had stated in his Budget speech that the loan waiver scheme “will be completed” by the end of June. An inevitable conclusion was drawn: the next general elections could take place earlier than scheduled.

Even if the PM and the FM had argued against a major loan waiver scheme involving Rs 60,000 crore – most media reports before the Budget had suggested that the size of the scheme could be somewhere between Rs 20,000 crore and Rs 30,000 crore – almost everybody in the ruling establishment had anticipated some sort of a loan write-off programme. The manner in which farmers were brought to 10 Janpath on Budget day and the way agriculturists in Maharashtra had planned celebrations made this evident.

Chidambaram has always defended his decision to initiate the Voluntary Disclosure of Income Scheme during his first tenure as finance minister in the United Front government. Then, as of today, he justifies the VDIS for ‘unearthing’ huge sums of black money. On one count, however, he acknowledged that the black money amnesty scheme had a drawback: honest taxpayers correctly felt they had been cheated, that they were made to appear foolish because they had diligently paid their taxes. The same logic holds good for the ‘moral hazard’ manifest in the farm loan waiver scheme.

Critics of the scheme have pointed out that the overwhelming majority of indebted farmers in the country have not borrowed from scheduled commercial banks, cooperative banks or regional rural banks. Rather, they have borrowed funds from local mahajans at usurious rates of interest. Whenever this has been pointed out to Chidabaram, his standard reply has been that he can do nothing about this kind of rural indebtedness in his capacity as FM. His critics point out that the establishment of debt settlement tribunals (along the lines of the one set up in Kerala) to deal with outstanding loans of farmers who have borrowed from private moneylenders, may have been a more effective way of tackling the problem of rural indebtedness.

The other substantive criticism of the agricultural loan waiver scheme is its blanket character. It is supposed to benefit 30 million small and marginal farmers and 10 million ‘other’ farmers. A marginal farmer is one with a land holding of up to one hectare while a small farmer is one who owns between one and two hectares of land. The fact is that in large parts of central India, in unirrigated areas, even so-called marginal and small farmers own more than two hectares although the land owned is dry and of poor fertility. Farmers owning land in excess of two hectares are only eligible for the one-time settlement scheme that provides a rebate of 25 per cent against payment of three-fourths of the loan outstanding. In other words, the scheme could end up benefitting only the relative better-off sections in the farming community, that too, in the more agriculturally-prosperous parts of the country.

It is not as if Manmohan Singh and Chidambaram were completely opposed to the farm loan waiver scheme. They were merely being cautious, as is their wont. They wanted the scope of the scheme to be much smaller. But they had to finally give in. Congress President Sonia Gandhi was initially ambivalent about acceding to the wishes of the ‘Left’ within her party. This section wanted her to be remembered in the way her mother-in-law Indira Gandhi is associated with the Garibi Harao slogan of the early-1970s.

Pitted against the ‘Left’ group in the Congress were the neo-liberals led by the Prime Minister himself, his Harvard-educated lawyer-turned-FM, the PM’s right-hand man in the government, Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission and the head of the Prime Minister’s Economic Advisory Council, Chakravarthi Rangarajan. Even industry and commerce minister Kamal Nath, who does not see eye-to-eye with Chidambaram on a host of issues including the issue of tax concessions to special economic zones, is considered to be part of the pro-liberalisation lobby in the government.

As for the ‘socialist’ faction within India’s ‘grand old party’, this section that eventually prevailed over Sonia Gandhi, included individuals like human resources development minister Arjun Singh, panchayati raj and North-East affairs minister Mani Shankar Aiyar and Rajya Sabha MP Arjun Sengupta who heads the government’s panel on unorganised workers. New additions to their ranks were defence minister A K Antony and party spokesperson and former Karnataka chief minister Veerappa Moily. Some of them wrote to the PM urging him not to adhere strictly to the provisions of the Fiscal Responsibility and Budget Management Act that Chidambaram had notified soon after he took charge in May 2004.

These Left-leaning individuals repeatedly said the UPA government must do something over and above the National Rural Employment Guarantee Scheme to distinguish its economic policies from those pursued by the Bharatiya Janata Party-led National Democratic Alliance government before it. This ‘socialist’ group argued effectively that the Congress stood to lose more support in the coming general elections if it was seen to be following ‘market friendly’ economic policies while merely preaching the virtues of ‘inclusive’ growth and ‘reforms with a human face’.

Under increasing pressure from this influential lobby and the Left, especially after the electoral defeat of the Congress in Gujarat, the PM, the FM, Ahluwalia and company had little or no choice but to go the populist way. The government’s decision to expand the coverage of the NREGS from 330 districts to the entire country had coincided with Rahul Gandhi being anointed party general secretary in late-September. An additional financial provision of Rs 16,000 crore has been made for the expanded NREGS in the Budget with the FM categorically saying: “Let there be no apprehension in anyone’s mind: as demand rises, more money will be provided to meet the legal guarantee of employment.”

But it was not enough to expand the NREGS. Much more had to be done. It was pointed out that popular resentment against the ruling regime was rising because of its failure to control food prices. This would be politically disastrous, the socialist group kept telling Sonia Gandhi. Even if the foreign currency reserves in the Reserve bank of India’s coffers were overflowing, food imports were no solution. World food prices, including prices of wheat, have risen to record heights and there is no indication that these prices will ease. There was no choice before the government. The loan waiver scheme had to be implemented, any which way possible. The objections of the neo-liberals were brushed aside. The PM and the FM were told they had no alternative but to fall in line. And they did.

The FM probably realises that the loan waiver programme can do only that much and no more to revive the agricultural economy of the country. Before he announced the debt waiver and debt relief programme, he said that the committee set up by the government under R Radhakrishnan had “stopped short of waiver of agricultural loans”. Here is a relevant quote from the Radhakrishnan committee report: “The root cause of the current crisis (in Indian agriculture) is not indebtedness alone – indebtedness is just a symptom. The underlying causes are stagnation in agriculture, increasing production and marketing risks, institutional vacuum and lack of alternative livelihood opportunities…”

Chidambaram realised that even as he would have to give in to the demands of the socialists in his party, he would be able to push through major income-tax cuts for the middle class. The reduction in the threshold exemption limit for all income-tax assessees and the changes in the slabs and tax rates resulting in a significant decline in the incidence of personal income tax, surprised even the most ardent liberalisers. Those in the highest income-tax paying brackets would now be able to gain around Rs 44,000 a year. The FM fondly hopes that half this amount would be spent and the other half saved.

Not only has the lowering of income-tax rates more than compensated for inflation, the FM has assumed that tax collections would remain as buoyant as they have in the recent past. If Chidambaram’s 2008-09 Budget estimates turn out to be accurate, for the first time in the history of India, total collections of personal income tax would exceed total collections of both excise duties and customs duties, each considered separately. While the overall tax collection regime in the country has undoubtedly become more progressive in the sense that collections of indirect taxes (excise and customs duties) as a proportion of total tax collections have come down and the tax-to-GDP ratio has increased, in one respect, Chidambaram did not even attempt to disturb the prevailing status quo.

In a nation of 1.1 billion people, less than three per cent of the population pays income-tax. What is worse is that two-thirds of the country’s income-tax assessees are salaried employees whose taxes get deducted at source before their cheques reach their bank accounts. True, the middle class is vocal and politically influential. Chidambaram has chosen to woo this section in an election year. In this section are central government employees who will be the beneficiaries of the ecommendations of the Sixth Central Pay Commission whose report is expected before the end of March.

Interestingly, whereas railways minister Lalu Prasad Yadav made a provision for paying higher salaries to railway employees in the Railway Budget he presented on February 27, the FM refrained from following his example two days later.

A day before the Budget was presented, on February 28, there was a notable box item on page 25 of the 400-page Economic Survey tabled in Parliament. The document is the annual report card of the economy that is prepared by the Department of Economic Affairs in the ministry of finance. The box item listed 12 ‘policy options’ that warmed the cockles of the hearts of gung-ho economic liberalisers. The options talked of changing the Factories Act by increasing the number of working hours a day from eight to 12. In other words, the work week would go up to 60 hours ostensibly to meet seasonal demand.

There was mention of selling off or privatising old coal mines and oil fields. Further, the Economic Survey talked about decontrolling the sugar, fertilizers and pharmaceuticals industries. The ‘policy options’ included the regulated entry of the private sector in nuclear power generation, hiking the foreign direct investment cap for insurance firms to 49 per cent, allowing 100 per cent FDI in retail outlets, allowing private companies to run public transport systems in cities, allowing 100 per cent FDI in privately owned greenfield rural/agricultural banks, entry of the private sector in railway freight operations and a bankruptcy law to expedite the exit of failed company managements.
That’s not all. The Survey suggested the equity shares of all PSUs be listed on the stock exchanges and the government be allowed to sell 10 per cent of the shares of each PSU to the public. What is more, it was recommended that ‘negative bidding’ be allowed to sell off those loss-making PSUs that had a high negative net worth – in other words, the government would actually ‘pay’ private companies to take over the ownership of PSUs with large debts and accumulated losses.
This set of ‘policy options’ was akin to waving the proverbial red rag before the Communist bulls. Chidambaram knew better than most others that these were the precise policy options that would have been opposed tooth-and-nail by the 62 MPs belonging to the Left parties on whose support the UPA government depends for a majority in the Lok Sabha. Why then did he choose to highlight these policy options in an official document presented in Parliament a day before the Budget? If Chidambaram’s intention was to lull the Communists into a sense of complacency, he was certainly successful. Not a single one of these policy initiatives found a mention in the Budget.
On the contrary, the FM went ahead and taxed speculative windfall profits of speculators on the stock exchanges by increasing the short-term capital gains tax from 10 per cent to 15 per cent – something that had been demanded for long by the Left. Not surprisingly, the markets tanked. It seems Chidambaram realised somewhat belatedly that the BSE sensex matters only to the chattering classes and the readers of pink dailies and not the masses who vote.

On the defensive, the FM’s impatience has been showing. An absence of conviction in what he is saying could be a reason why Chidambaram has been less than accommodating in his behaviour towards those who have been persistently criticising him. He almost terminated a television interview that was being broadcast live a day after the Budget when he was repeatedly asked about the farm loan waiver scheme. He calmed down thereafter and continued with the interview.
The task that lies ahead of the FM is not going to be easy. As already mentioned, food prices are on the rise and there is little that can be done by way of fiscal and monetary measures to douse inflationary expectations. Whereas high world crude oil prices, the slow growth in domestic agricultural output and the impact of the slowdown in the US economy on India’s volatile capital markets have all posed major problems for Chidambaram, he has been rather lucky (to use his own words) because tax revenues have been extremely buoyant. Direct taxes on personal and corporate incomes have jumped 40 per cent over the last year.

All finance ministers are paid to be optimistic and Chidambaram is no exception. He is confident the growth momentum will be sustained despite the fact that GDP growth has slowed down from 9.6 per cent in 2006-07 to an expected 8.7 per cent this fiscal year. The FM also hopes his strategy of improving revenue collections while moderating tax rates will continue to work wonders because of higher compliance and that the fast growth in corporate profits would continue.

Budgets in India are traditionally much more than bland statements of financial accounts, or even an account of the government’s economic policies. The presentation of the Budget is an occasion to make political pronouncements. It has always been that way. This time round, the political content of the Budget is more pronounced. In certain respects, the government is perhaps not all that unhappy that the farm loan waiver scheme is a hot topic of discussion and debate – like the India-US nuclear agreement. It is better for the powers-that-be that farm loans be discussed instead of a political hot potato: rising food prices.