Posted by: John Elliott | February 29, 2008

India waives $15B in loans to rural poor

India’s Finance Minister Palaniappan Chidambaram produced a populist annual budget this morning, aimed primarily at helping the rural poor, whose plight contributed in 2004 to the defeat of the country’s last Bharatiya Janata Party-led government.

In a dramatic gesture that almost eclipsed the rest of his 30-page speech, he waived overdue loans totaling an estimated $12.5 billion that are owed by 30 million farmers who have less than two hectares (five acres) of land. He pledged another $2.5 billion to help 10 million more settle loans.

Chidambaram also boosted the government’s spending on education by 20% and on health by 15% – both initiatives that will help the poor if they improve frequently dilapidated and under-performing social services.

With an eye on other income groups, he raised income tax thresholds and provided stimulus for cars, motor bikes and other consumer durables that would help sustain India’s current growth rate of around 8.7%. Growth last year was 9.6% and there is a fear that it will slip further.

Chidambaram did not shy away from accusations that this was a pre-election budget. Speaking to journalists this afternoon, he produced a characteristically laconic reply to a questioner who asked whether he was trying to win votes and said: “If you have nothing else to say about the budget, then I suppose you could call it an election budget.”

That is not surprising because there is widespread belief that Sonia Gandhi, the Italian-born leader of the Congress Party that leads the current coalition government, forced the loan scheme on him. She publicly called on him last week to deal with the loans, and this afternoon her party managers bussed farmers from the nearby state of Haryana to her Delhi house to thank her.

The timing of the election is uncertain. Polls have to take place by May next year, but could come this year if Leftist parties decided to withdraw support from Congress. They might do this if talks that are now being revived on India’s proposed nuclear deal with America, which they oppose, seem to be nearing agreement.

Alternatively, they might break away for some other reason in order to re-establish their independent identity before the polls. That could even happen with the tacit agreement of the Congress Party, which might also want to separate itself from the Left before the polls.

When the current government came to power in 2004, it promised to help the 70% of the population who live in rural areas and who are mostly involved in agriculture. Votes from these groups helped to bring down the BJP government that claimed India was “shining.”

But the government’s efforts to provide financial and other support have fallen short of targets because of corruption and leakage in delivery systems. Today’s $15 billion package is an attempt to break through that impasse and help farmers hit by bad loans – a problem that has led to tens of thousands of farmers with sub-standard cotton and other cash crops committing suicide in the past decade.

The government will announce how the scheme will work in the next few weeks. It will start in June and provide registered banks and cooperatives with funds over three years to support their liquidity and compensate them for writing off and settling the loans.

The plan has met with some criticism, partly because research shows that the most suicide-prone farmers are in debt to unauthorized money lenders and middle-men, who account for some 40% of rural lending and charge as much as 30% interest. Bankers are pleased because it will help them clean up their balance sheets, but there is concern about whether the scheme can be efficiently managed.

The stock market was unimpressed – the key Mumbai Sensex fell sharply during Chidambaram’s speech and then recovered to close about 1.2% down on the day. The question now is whether the $15 billion will not only help alleviate the misery of 40 million rural poor but will also buy their votes when India goes to the polls – and that is not certain.


Responses

  1. Irrespective of whether the feds providing a 200 billion dollar (write off) credit facility for corrupt bankers or farmers, it tilts the scale in the wrong manner. It punishes the right and rewards the wrong. Neverthless if it would stop a few (million) farmers from committing suicide, anything is ok. After all it is nothing more than 15 billion pieces of paper with some funny prints on it – Donkeyfood

  2. If this is a handout, so be it.

    It does not make sense to try to make someone who is poor pay back a loan. If someone is living in abject poverty, they should not have to borrow money. They should receive money with no strings attached. You cannot work your way out of poverty. You have to be given enough money so that you will not be poor. That is how you end poverty.

  3. Fine,waived 60K crores for farmers.Fact forgotten was to rationalize.Bad idea for a FM like this stature who could not respond appropriately to any of the TV channel regarding this issue.

  4. I am an Indian and I have read what people had to say. Personally I feel this is just bad economics.
    What about the farmer who repaid his debt? He is not being rewarded and instead is in certain way being punished.

    What if I was a farmer and took a loan of USD 1 million and didn’t pay it back?

    The best way to solve the issue of poverty is to increase productivity and let the private sector enter it. Today in India telecom is doing so well because the private sector is so active in it.

    I don’t think hand outs are the best way to solve economic issues.

  5. Unfortunately, this is just a bandaid for a chronic disease. What India needs to do is end the curse of poverty. What’s that curse? Have more babies than you can afford. Wherever you find that curse in the world, you find terrible poverty: Asia, Latin America, Africa.

    So, for effectiveness, they would have been better off spending the money on family planning / birth control.

    Of course, they face the election now, and their interest in getting reelected is greater than their interest in doing what will solve the problem in the long term.

  6. Unless there is a BIG effort from Politicians and Business people, nothing will change in poor man life, and I don’t see such thing happen ever. Rich will always get richer and poor stays the same. All you can see is, stunts like this before elections.

  7. Yeah it is me again.

    With India being over populated and not a solid agricultural player due to the amount of arable land my heart goes out the world because our politicians have decided to make gas out of food.

    This troubles me because the gas made from grains will actually cost more and require more energy to refine than regular oil.

    I can’t see the logic but hey I’m not in charge, W Bush is and he hasn’t even mastered the english language. Only in America.

  8. Run the numbers 15 billion divided by 40 million. The India bailout is $375 per farmer.

    Doesn’t seem like much compared to the $600 tax rebate that W is sending the Americans.

    To NYC – If the US bailed out the homeowners here in the good old USA (where most people shun responsible purchasing) it would be much more. Median house price hovers around $200,000 and there are millions of homeowners in trouble. Say the government gives $100,000 to 4 million facing foreclosure, thats $400 billion and it does nothing to address the corruption at the lenders who caused the mess.

    Plus the really sore spot with me is, I bought a house I could afford not a house that realtor talked me into after a corrupt appraiser bumped up the value on his/her appraisal. I don’t look kindly upon those who keep harping about bailouts, it is time to pay the piper!!

  9. Really good move by Chidambaram. Now, he just has to make sure that the poor farmers who really deserve it get all their loans pardoned without feeding the pockets of corrupt politicians.

  10. USA also do same way and give revive home loan people at least 5 times what India did..

  11. Isn’t the same thing done in usa- tax break,economic stimulas checkof $1200 (for family) in election year. before that the law-makers were sleeping to see the current crisis build-up

  12. More money to fund the election of corrupt Indian politicians…

  13. Oh sure. Do you know who the poor are who have not paid back their loans – its all the politicians and their families, local administrators and their families, mafia etc. The money will vanish in the pockets of the corrupt administration and the poor will hardly see a dime of it. These things have been going on for years but india’s poor has’nt gone away.

  14. If the poor fall, pick them up. India is showing the world how to do this.


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