Fruits of populism PDF Print E-mail
Saturday, 25 October 2014 00:00
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SC ruling on UP cane will end up hurting its farmers

Uttar Pradesh’s farmers and politicians who are celebrating the Supreme Court’s verdict on cane arrears would be well advised to hold on a bit. Newspaper reports suggest that, with the Supreme Court ruling that farmers’ payments would receive priority over the claims of secured creditors, bankers are reevaluating whether they want to make further loans to sugar mills in the state. In which case, even if sugar mills finally agree to begin crushing operations next month, they may not have the money to be able to do so. Coming as it does on top of the sugar mills already protesting against the state’s unviable State Advised Price for cane purchases—mills want the state to adopt the Rangarajan formula of paying farmers 75% of whatever they recover from the sale of sugar and other by-products—this could ensure the state’s farmers will be the worst-hit. Indeed, bankers would do well to take the matter to a bigger bench since it sets a larger precedent. Till now, under the law, the rights of secured creditors come first. If the Supreme Court has over-ruled this in the case of Uttar Pradesh’s farmers, there is no reason why the same precedent cannot be cited in other cases. In which case, loans given with a collateral effectively get de-collateralised.

There is a larger issue here that both politicians as well as judges need to keep in mind, that populism doesn’t pay in the long run. In the case of SKS Microfinance that was prevented from recovering its loans in Andhra Pradesh, the motive may have been an honourable one, of keeping interest rates low for borrowers. What it ended up doing, however, was to raise the risks of lending so dramatically, microfinance institutions simply exited the state; with banks not in a position to fill in the void, all that this resulted in was the state’s citizens went back to moneylenders who charged them much more than what companies like SKS charged. In the case of the pharmaceuticals sector, an ill-conceived price-cap scheme has resulted in the production of various drugs being stopped by reputed manufacturers, so the drugs are either in short supply or are of poor quality. Similarly, in the power sector, not allowing electricity producers to charge a fair price has led to a situation in which producers are owed tens of thousands of crores, as a result of which the sector is in a perilous situation. Examples such as these abound in most sectors. It is in everyone’s interests that a larger bench of the Supreme Court be petitioned to examine the issue afresh, given its larger connotations.



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