There is enough evidence in the Finance Minister's Budget speech that the farm loan waiver decision was a piece of supreme deception

Budget 2008 has transformed Finance Minister P Chidambaram from a Harvard-returned sophisticate into a Charan Singh from Baghpat. Mr Chidambaram has declared that farmers who defaulted on their dues up to December 31, 2007, and did not pay up till the date of the budget are eligible for his gift of debt relief. An honest farmer who paid his dues regularly must be cursing himself and the one who paid the December 2007 dues on the morning hours on February 29 must have had a heart attack. Mr Chidambaram has asked for no budgetary support for his gift and yet wants the Parliament to bless the write-off of Rs 60,000 crore of bank money, which represents public savings -- something over which Parliament has no control.

When asked, in the absence of budgetary support, where the banks would find the money to book the write off, the Minister's reply couldn't have been more evasive. He said, "The Rs 60,000 crore given by the banks to the farmer may not come back; part of it may come back. We will provide liquidity to the banks equivalent to the write-off over the period during which they would have recovered the amount of Rs 60,000 crore." Mr Chidambaram's reply would stun anyone with basic understanding of finance. The issue in a write-off, which dents the Profit and Loss Account, is not liquidity, but, solvency and capital adequacy. So the Minister seems to have gone wrong on the basic principles of finance and accounts. Or, if he is right, then the banks must have already made provisions in their P&L Accounts to cover most of the waiver and already taken the hit in their balance sheets.

In such a case, by a sleight of hand, the Minister is suppressing that fact and is, not so honestly, taking advantage of what the banks have themselves decided, namely forget about the dues of the farmer, which is now being passed off as the "momentous" decision of the UPA Government. Since, in such a case, the Finance Minister would be guilty of deceit, such a view must be firmly resisted. But, only time can say whether the Minister is wrong or guilty of deceit.

Again, Mr Chidambaram dismisses the entire Rs 60,000 crores as not only Non-Performing Assets (NPAs), but also as irrecoverable debts, even though all NPAs need not be irrecoverable. Moreover, according to the latest RBI Report on Trend and Progress of Banking in India 2006-07 (at p96), the gross NPA of all commercial banks put together was Rs 50,519 crore, out of which the share of NPAs on farmers' loans was only Rs 7,367 crore. That is, out of the outstanding farm loans of Rs 230,180 crore, the gross NPA is Rs 7,367 crore. The net must be far less. In defiance of this authentic truth, the Minister tells the nation that banks will write off Rs 60,000 crore as NPA and irrecoverable. See the effect of the write-off. The net owned funds of scheduled commercial banks as on March 31, 2007, stood at Rs 219,174 crore. The write-off would knock off a huge amount from this number and bring it down and undermine the capital adequacy. Moreover, there are disturbing clues that the debt write-off decision could be an interpolation in the Budget speech that had already been readied. All that was perhaps done was to add a paragraph, namely Para 73, which did not affect the budget numbers as the waiver was just an oral gift of the banks', not the Government's, money.

First, the idea to write off banks debt was never in contemplation as other, perhaps better, measures were in the pipeline. In his 2006-07 Budget speech, the Minister had referred to the recommendations of Radhakrishna on farmers' indebtedness and assured Parliament that he "would act on the report as soon as it is received", implying that the report would be implemented. The report, submitted in August 2007, said, contrary to the Minister's view that the debt due to the banks kill the farmers, that it is the farmers' debt obligations to private money lenders, not the bank dues, that kill them.

The group found that some 74 per cent of credit line for farmers came from private sources at rates of interest ranging from 20 per cent to 36 per cent, plus with small farmers who account for 80 per cent of the indebted dependent more on such loans. The panel had called for social efforts to settle the private debts and also commended one-time term loan to the farmers to help them to pay off the exploitative private loans. In its midterm review (October 2007), the RBI constituted a working group to examine the panel's suggestions and submit its views by December 2007 after consulting all stakeholders. The Minister's assurance to the House was being followed up by RBI. So, till December 2007 at least, there could be no proposal for write off.

The Radhakrishna group had zeroed in on the true evil - private lending - as the villain. But there is not a word in the budget speech about how to deal with the menace of the killer private lending.

The second clue is critical. In paras 10 and 56 of his oration, the Minister says that by March 2008, agricultural credit would exceed the target to top Rs 240,000 crore. For 2008-09, he set a target of Rs 280,000 crore. Obviously, the write-off was nowhere on the horizon when paras 10 and 56 were keyed in. Here is the maths that indicates that it was a later interpolation. The figures of Rs 240,000 crore for 2007-08 and Rs 280,000 crore for 2008-09, include Rs 60,000 crore as if there was to be no waiver. The Minister had included the amount of Rs 60,000 crore that would remain part of loans outstanding and due a year from now. So the decision to write it off in June 2008 is clearly an afterthought.

But at what point in time would para 73 have been smuggled in? A clue again. On February 20, the Minister shared the dais with Ms Sonia Gandhi, Mr Rahul Gandhi and Mr Murali Deora in Rae Bareily in a farmer's rally. Reports say that Ms Gandhi asked the Minister in front of the farmers "to keep the hardships faced by (among others) farmers in mind while preparing his budget".

Agreeing with her, the Minister told the farmers that the banks "are not doing a favour when they lend money to you" and added, they "are discharging their duty, when they are lending the money". If, at Rae Bareily, the Minister reminds banks of their duty to lend, having already decided in Delhi to write off what was lent earlier, that would be by inference, great deception. But with Ms Gandhi's command and the Minister's response at the farmers' rally, it is more benign to infer that the 'momentous' write-off order was not issued by North Block, but rather some political office.

QED: The Rae Bareily road show cost the nation Rs 60,000 crore with no relief to the farmers from the private debts -- read the real evil.

The writer is a columnist and convener of the Swadeshi Jagaran Manch

Courtesy: www.dailypioneer.com, March 08, 2008