So what are you guys thinking about the biggest economic move done in this years budget. A 60000 crore(600 billion) farm waiver of loans to all the farmers who have borrowed money from registered government banks and have holdings of less than 2 hectares.

Now there are obviously arguments to be made on both sides. While the print and the news media by and large highlight the bad points, lets look at the good points on how this move benefits the farmers.

1) For starters the people who were being driven into despair by being heavily in debt now can breath easy with the loan waiver. Even though it will benefit some smaller group, its still benefiting someone which is a good thing.
2) The other advantage is that the group of people can now take advantage of the cheaper credit rates at 7% as against the double digit rates they took their loans at. (more about 16%) So there is a better chance of them repaying it in future now that the amount is lesser.

I think the above are good valid points and to make arguments that its a populist budget and so bad in a way doesn't cut much ice. At the end of the day governments in a democratic society have to look after the people who elected them. IT industry has had a free rein for a long time(it got taxed since 2 year but that wasn't the case before) and no one really complained.

However i just feel Chindambram could have done a better job as far as dealing wth the money lending issue is concerned from private money lenders. Why there is no law on fixed cap of interest by any private player is beyond me. Its as simple as making it mandatory that this is the maximum interest rate you can ever charge, which should probably make it easier to deal with the problem if it arises in future. Obviously one reason why this has not been done is that there will not be an incentive then for the private players to give a loan but these days with the thrust on rural credit(the only thing thats actually grown last year as per economic survey) that should not be a problem. Easy credit at cheap interest rates is available via banks and if the farmer has some collateral it would be easy to get credit from registered agencies. Which is what the government is looking for. (Its a bit debatable whether the banks will show the same enthusiasm now in giving credit, but if the guv's word is to be believed full monetary support will be provided to the banks which should protect the banks from any losses.)

The other argument is the so called moral hazard. I don't think its any use saying that there is no moral hazard. There very much is. You are rewarding people who have not paid the loans, and in some cases might have been dishonest too, while giving no help to those who paid their loans. The question is whether this will effect future repayments and what is the future of rural credit. Most economists predict that it will impact future repayments.

I tend to disagree based on past experiences. All are familiar with the IT write offs we saw in late 90's by the government. It was practically rewarding the thugs and giving them an opportunity to convert the black money into white at a fraction of the cost which they should have paid as IT if they were honest. That was a moral hazard also. It would have if the present theory were to be applied, created less IT recovery with more people counting on another such write off. But we have actually seen better returns, tax buoyancy across the sectors and tax evasion that's on the decline. A stable tax structure which is easier for all i think helped here. That's why i think if you have cheaper farm credits now, then it will be more plausible for the farmers to pay back and live happily rather than count of another waiver and worry about it if and when that would come.


I have deliberately not gone into the negatives. There are too many and highlighted already. Here are the two best sources.

Why farm loan waiver is a bad idea
Why the Loan Waiver is Immoral

^^ On the last article, i think Gurcharan das presents a good case and i agree as far as winning election goes, Congress will not win an election based on this alone, if it is going to. Actually i don't think its going to win much support on this plank.


Any opinions on the topic fellas