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.