Indian policymakers, in 1950, began with two main objectives for the economic planning process, firstly, increasing productivity and secondly, reducing inequalities. These were reiterated a week ago when a bespectacled Palaniappan Chidambaram in his trademark veshti read out a not-so-trademark-Chidambaram budget for the next fiscal. Though termed an election stunt, it is a sound mix of politics and economics.
What is the most important part of the Budget not only because of its size, but also its impact, is the Rs. 600000000000 (done intentionally) loan-waiver. Needless to add, it is also the most controversial. What economic sense does this make?
Right, so let’s begin with the problems Indian agriculture currently faces. Productivity increases at a mere 2.7% per annum despite 66% of the population being involved in the sector. Moreover, the sector contributes only 13% to the country’s GDP. As a result, farmer suicides in various parts of the country are rising – a poor testimony to India’s agrarian economics.
Considering the current scenario, what is it that we need? A survey by economists Fan, Gulati and Thorat revealed that road investments and Agricultural R&D are the most effective measures to develop rural areas – and unarguably so.
This was proven by the Green Revolution, which in the 1960s increased farm produce, by improving the use of fertilizers and HYVs (High Yielding Variety of seeds) and double cropping the farmland. The industrial sector witnessed a revolution of sorts with the reforms initiated in 1991, but no reform was initiated towards agriculture. What is really needed is another revolution in the agricultural sector. A new revolution would need to focus on improving infrastructure and providing better insurance against crop damage.
But, we need to consider that the problem of farmer suicides is one that needs an immediate, short-term solution, and this debt-waiver provides just that! A plane can take off only when it is on the runway. This debt-waiver doesn’t or at least shouldn’t aim at being THE solution, but should provide the doorway for one. It is helping the plane move towards the runway, and only when that happens can the plane take off. And for that, the development of infrastructure – economic and social – would be required.
This budget is not quintessentially a Chidambaram one. It’s also ironic that it is the same trio of Manmohan-Chidambaram-Montek, which in 1991 reduced government spending. This, in itself, says a lot.
The situation then was very different – foreign exchange reserves sufficed only for a week’s oil imports, the government’s fiscal deficit scaled new peaks, the Gulf crisis aggravated our BOP problem et cetera. Today, despite its low tax policies, the Government of India has made more money than ever. India’s foreign exchange reserves are a whopping $300 billion. Fiscal deficit, at a 2.5% of the GDP, has never been this good. Add to this the GDP which has been increasing at an average rate of 8.8% per annum, during the UPA’s tenure.
It would only make sense to finally let this money trickle down to the bottom of the pyramid. The industries have had it good for the last four years; it’s now time that agriculture reaps the benefits of India’s success story.
The current recession in the American economy stems from the low credit worthiness of takers of home loans. By waiving agricultural loans, the government is also preventing a sub-prime-like crisis from happening in India.
Having said all the above, I would reiterate that the process of reforming agriculture and developing rural areas shouldn’t be only about a magnanimous loan-waiver. Here is where the process begins, and this process is beyond the scope of a single budget.