The Hindu Business Line : The Santa Claus syndrome

The ballooning debt waiver will not only seriously damage the banking sector but also irreparably harm our national character. Such schemes breed contempt for the law and any contractual obligation.

Arvind P. Datar

In Budget 2008-09, the Finance Minister, Mr P. Chidambaram, announced the write-off of Rs 60,000 crore of loans given to small and marginal farmers holding up to two hectares. For other farmers, 25 per cent of the outstanding amount was to be written off. Other ministers and politicians were quick in claiming similar relief. The Agriculture Minister, Mr Sharad Pawar, called for a waiver of loans given to fishermen and also for increasing the minimum exemption area from two to five hectares.

The Finance Minister has accepted some of these demands and the subsidy will now cost the exchequer Rs 71,680 crore. Farmers cultivating up to five acres of land are also eligible and the scheme has been extended to poultry, dairy and bee-keeping.

The domino effect has been felt at the State level as well. The Tamil Nadu State Budget for 2008-09 provides for a complete waiver of loans given to handloom weavers. Housing loans up to Rs 25,000 availed by economically weaker sections from co-operative banks have also been written off.

With elections for several State assemblies looming ahead, it is only a matter of time before this Santa Claus syndrome spreads to different States, and each Chief Minister tries to outdo the other by writing off or waiving loans given to different sections of society.

Counter-productive

The loan waiver scheme will be counter-productive and, ironically, affect the small and marginal farmer the most. A recent article in the Economic and Political Weekly (March 15-21), discusses the disastrous consequences of the debt relief scheme announced by Devi Lal in 1990-91.

The share of moneylender’s loans to farmers had actually increased from 17.5 per cent in 1992 to 26.8 per cent in 2002! All attempts to control exorbitant rates of interest charged by money-lenders and various schemes of debt relief have miserably failed. Indeed, it is impossible to control or regulate the money-lender and his usurious rates of interest. The present loan waiver will only tighten the stranglehold of rural Shylocks.

Muhammad Yunus, Nobel laureate and founder of the Grameen Bank in Bangladesh, perhaps knows more about lending money to the poor than all our Finance Ministers combined. In his book Banker to the Poor, Yunus specially points out that Grameen Bank never, never writes off a loan.

Even after a cyclone or flood, so common in Bangladesh, the Grameen Bank would reschedule the loan and give a longer grace period for repayment. But it never wrote off the loan. Yunus states: “The repayment of loan boosts the self-reliance, pride and confidence of an impoverished person in his own ability. To forgive a loan does just the opposite and can undo years of difficult work in trying to get that borrower to believe in his or her own ability. When Governments forgive loans extended by nationalised banks, it creates an almost untenable situation for micro-credit programmes to recover their money”.

Rewarding law-breakers

After 60 years of pro-farmer policies, the agricultural sector is still in a sorry state. Every budget has numerous schemes for rural employment or some other relief. But large amounts allocated for roads, irrigation and other projects are consistently siphoned off. Rajiv Gandhi famously admitted that only 19 paise of each rupee reached the poor. The confession implies that 81 per cent is knocked off by politicians, bureaucrats and contractors.

Farmers enjoy a huge fertiliser subsidy, free power and minimum price for their agricultural output. But these benefits clearly do not reach the rural poor and have failed to make the small farmer financially independent. It is clear that subsidies, handouts and freebies are not the solution to the problems facing the small and marginal farmer. The loan waiver scheme will not only seriously damage the banking sector but, even more importantly, do irreparable harm to our national character. Such schemes breed contempt for the law and any kind of contractual obligation.

Over the last several years, we have consistently rewarded law-breakers and punished law-abiding citizens. Income-tax evaders are not prosecuted but given the benefit of voluntary disclosure and samadhan schemes. Builders who flagrantly violate building laws are given the benefit of “regularisation”.

Farmers who repaid their loans despite all odds cannot but feel a sense of outrage; indeed, farmers who repaid their loans and honoured their contractual obligations look like idiots while the defaulters can literally laugh their way to the bank.

Risk of fraud

The loan waiver scheme will now increase the demand of different sections of society for getting waivers and write-offs. It can also breed serious fraud. Loans can be taken in the name of existent or non-existent farmers or labourers by the local political mafia and periodically written off.

The success of Germany, Japan and Singapore has not been accidental. It is, in each case, a result of visionary leadership and the dedication and discipline of the people. It requires men of stature to make a country economically strong and have the necessary self-discipline and integrity not to allow anyone to plunder the country’s resources.

On the other hand, it requires no intelligence to write off loans or distribute other gifts to the public. From the distribution of free sarees and dhotis, we have graduated to colour TVs and gas stoves. What prevents political parties from promising one motor-cycle for every family belonging to the weaker sections?

The distribution of largesse at the cost of the tax-payer is very simple and can be accomplished by any politician; good governance requires politicians to rise to the level of statesmen.

The Santa Claus syndrome will have a crippling effect in the years ahead. With coalition politics taking centre-stage, long-term national interests are being increasingly sacrificed for short-term political gains. The loan waiver scheme was perhaps the worst way of helping the small and marginal farmer.

(The author is a Senior Advocate of the Madras High Court.)