The Hindu Business Line : The waiver and beyond

One of the perplexing questions on the Rs 60,000-crore debt waiver for small and marginal farmers appears to have been answered by the Prime Minister in Parliament. Assuring the House that banking entities as creditors would be adequately protected, and that they would not suffer liquidity contraction, Dr Manmohan Singh pointed to tax and non-tax revenues as the sources of funds for this “income transfer on an unprecedented scale.” This clarification suggests that the write-off would add to revenue expenditure. Given the heavy load of budgeted provisions on this account compared to capital expenditure, North Block will have to pray for a good year to mitigate the waiver’s impact on the fiscal deficit and rethink its commitment to the FRBM.

More than just clearing the air about funds for the waiver, the Prime Minister has provided the most convincing case so far for this measure. The idea that creditors may not often recover both principal and interest has been debated the world over and, increasingly, institutions such as the IMF are coming round to the view that not insisting on full repayment pays dividends in the long run. That principle has been applied to erstwhile basket cases Russia, Indonesia and parts of Africa, where global lenders have recovered less than 100 cents on every dollar lent if that “sacrifice” helped the ailing economies gain lost ground quicker. That principle worked in reviving heavily indebted Indian steel firms some years back, when term loan institutions applied a variety of schemes to mitigate their heavy exposures without getting back the full value of their loans. Many may not recall that phase as the steel industry has been on a roll since, but the reduction of the debt burden played no small part in its fortunes.

Dr Singh, however, overstates his defence when he justifies the write-off as a correction of the previous government’s failure. The present one has had four years to rectify the errors. The debt waiver needs additional forces to help in the rescue mission. Non-formal debt is the more pernicious burden on the small farmer and the Radhakrishna Committee has commendable ideas on how to rein in such usury. Increased outlays for the rural sector are a positive improvement over the past but futile if delivery systems leak and investments do not materialise. The investment rate in the farm sector has improved from 10 per cent to 12 per cent during the UPA term. Given a low base, a more dramatic improvement is needed to spur income-generating capacities. The debt waiver is a good start, though it is better to teach a hungry man to fish than simply feed him.

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