Loan defaults: rural debtors go to hell, corporate debtors go to parliament

By Inderjit Singh Jaijee

Earlier this year, while on the campaign trail in Uttar Pradesh, Prime Minister Narendra Modi declared “I will make sure that the first Cabinet decision after forming the government in Lucknow will be to waive loans given to farmers in Uttar Pradesh.” (Financial Express, March 15, 2017) But less than a month later, the BJP-led Central Government changed its tune. It was left to Union Minister of State for Finance Santosh Kumar Gangwar to tell the Rajya Sabha “There is no proposal under consideration of the Union government to waive…loans of farmers of the country.”(Hindustan Times April 30). A month later Union Minister of Finance Arun Jaitley said it again: “I have already made the position clear that states which want to go in for these kinds of schemes (farm loan waivers), will have to generate them from their own resources. Beyond that the central government has nothing more to say.” (PTI June 12).

The Centre excuses itself from helping the states to help the farmers on two grounds, namely:

1)            Neither the National Bank for Agriculture and Rural Development nor the Reserve Bank of India favour relief for agricultural debts.

2)            Agriculture is a state subject, hence no allocation can be made for agriculture-related heads under the Union Budget. The Central government might be able to make loans to states for the purpose of bailing out farmers but it cannot make a loan if the level of fiscal deficit exceeds 3 per cent of the Gross State Domestic Product. A state that allocates money to waive agricultural debt will certainly incur a fiscal deficit vastly in excess of 3 per cent.

Both these arguments are shot through with contradictions.

Let’s start with the opposition to farm debt waiver. Reserve Bank of India Governor Urjit Patel strongly opposes loan waivers. He doesn’t like them because they increase government spending, widen fiscal deficits and … THEY ARE IMMORAL. What will happen to India’s credit culture if governments go around waiving debts all over the place, he asks.

But Mr Patel refers to agricultural debt only. He has nothing to say about the Rs 1.14 lakh crore of corporate debt waived by 29 state-owned banks between financial years 2013 and 2015. Looking at bad debts written off in 2016 only we see that the largest write off (Rs 1201 lakh crore) went to Kingfisher Airlines; the quantum of lesser write-off in the top 10 list was on average around Rs 400 lakh crore.

While the names of some of the biggest defaulters have come out in the press it is unclear how reporters found out those names because the Reserve Bank of India refuses to disclose the list of those who took big loans from public sector banks and defaulted. This refusal is despite a 2015 order of the Supreme Court to make this information public. (Incidentally, if a person or institution flatly refuses to honour a Supreme Court order, is this not contempt of court?)

Anyway, everybody knows the name of at least one big defaulter – He is Member of Parliament Vijay Mallaya, uruf ‘The King of Good Times’. Mallaya owns United Spirits, Kingfisher Airlines, Force India and many smaller enterprises. He is alleged to owe around Rs 100 cr to banks, the government, and former employees.

Another defaulting legislator is Kothapalli Geetha, Member of Parliament from Araku Valley, Andhra Pradesh. She was outed when the press reported that she and her husband, were being sued by Punjab National Bank for not repaying a Rs 81.21 crore loan. The loan, taken from PNB’s corporate branch in Hyderabad’s posh Banjara Hills, dates back to 2008. By December 31, 2009, it had become a non-performing asset after their Rs 25 crore cheque bounced.

The refusal to disclose the identities of defaulters pertains only to big-time borrowers. When a small farmer defaults on his loan, his name is put in newspapers advertisements prior to auction of his assets.

On April 28, 1998, MASR wrote to the President of India, KR Narayanan:

You are no doubt aware that suicides by farmers in several states have increased to such an extent that it has become a matter of national concern. Reports appearing in the press link these deaths to economic distress arising out of unremunerative prices, crop failure and indebtedness.

The President forwarded this information to the Prime Minister and the Planning Commission.

Later that year, at a rally in Amritsar, the then Prime Minister, Atul Behari Vajpayee enquired from the Punjab Chief Minister Parkash Singh Badal if any rural suicides had taken place in Punjab. Badal denied that any farmer suicides had occurred in the state. This statement was greeted with outrage in the State Assembly. MLAs like Hardev Arshi pointed out that rural suicides were rampant in Punjab. Mr Badal accepted the contention and promised to give Rs 2.5 lakh to each family of a suicide victim. He remained in office for nearly a year after that but did not follow through on his promise.

In 2008 the then Union Minister of Agriculture Sharad Pawar was asked why the Rs 4000 cr package given as relief to suicide-affected states was confined to the southern states and omitted Punjab. He replied that the Punjab Chief Minister, Parkash Singh Badal, had informed him that only three farmer suicides had occurred in the state.  Parkash Singh Badal and his BJP allies all along downplayed rural suicides and agrarian distress in Punjab.

As for agriculture being a state subject, is that true? In 1965 Union government set up the Commission for Agricultural Costs and Prices (CACP) under the Ministry of Agriculture and Farmers Welfare. At various times in the year, the Union Cabinet Committee on Economic Affairs announces the Minimum Support Prices of various agricultural commodities based on the recommendations of the CACP. If agriculture is a state subject then why aren’t MSPs left to the discretion of the state governments? Moreover, the cost of agricultural inputs, such as pesticide and fertiliser, is set by the CACP and not the state governments.

The Union government controls the costs and prices, thereby determining the profitability of agriculture but when these fixed elements combine to make it impossible for a farmer to realise enough profit from his labour to repay his loan, then the responsibility of relieving his distress falls solely on the state. The Reserve Bank says ‘never mind that the centrally determined terms of trade have beggared the farmer, if he fails to repay he is immoral and a threat to the entire credit system.’

The long-term outlook for agriculture is good because as population increases the demand for food increases. The problem is that agriculture is characterised by long-term financial viability but short-term vulnerability. Farming has always been a gamble. When the farmer sows his crop he is betting that weather conditions will be favourable, that pests and diseases will spare his crop, that affordable labour will be available, that demand will be favourable, that he will get it to market without incident, that his crop will be assessed as Grade 1. He knows that he cannot win this wager every year but he hopes that his gamble will pay off with sufficient frequency to keep him in business.  Yes, farming is a business. A businessman will invest only when he has some reasonable expectation of making a profit. What would a businessman do if he were legally restricted from selling for more than Rs 100 a product that cost him Rs 150 to produce? A businessman doesn’t ask to be guaranteed a profit but he does expect that the government will not tie his hands or, through pricing policies, ensure that his returns never match his investment.

India wants to achieve a high level of economic growth. An important ingredient in the recipe for economic growth is low labour cost. Labour cost can be kept low when the worker’s cost of living is kept low. A large component of this is low food cost. Since the government is the largest purchaser of grain, it could purchase from the grower at a remunerative rate and sell to the consumer at a subsidised rate. The Indian government has not subsided food cost, rather it has compelled the farmer to subsidise food cost by making it impossible to sell outside official mandis at official prices. It dictates the cost of production and the price of output. One thing it does not dictate is the cost of credit. Few farmers are eligible for institutional credit; they depend on informal lenders – chiefly commission agents – who charge high interest rates.

Debt is an important source of funding for investment in agriculture, it supports expansion, improved machinery, technology and techniques. Debt is not a problem if the debtor holds sufficient equity. Any banker will explain that a farmer is considered an acceptable loan risk if the value of his land exceeds the value of the loan. Rising value of agricultural land has kept farm loans going. While debt has grown significantly, so too have average farm-land values. It’s similar to owning a home that has increased in value which enables more borrowing against its value to occur.

Decades of subsidising India’s economic growth has resulted in depressing farm incomes below starvation level. Now the farmer can’t stay in the game any more and the government and the banks talk about credit culture and morality!

Omar Khayyam expressed the situation very well in his Rubaiyat …

Oh, Thou, who didst with pitfall and with gin
Beset the Road I was to wander in,
Thou wilt not with Predestined Evil round
Enmesh, and then impute my Fall to Sin!