Promises galore with elections in the air PDF Print E-mail
Wednesday, 28 November 2018 04:08
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At some point, the Election Commission should ask parties to explain how they are going to fund the largesse


It is not clear if voters actually get swayed by election promises, but Congress president Rahul Gandhi is taking no chances since it would appear prime minister Narendra Modi’s promises of a loan waiver for farmers in the Uttar Pradesh campaign did wonders for his party nearly two years ago. Gandhi has now promised a loan waiver within 10 days of coming to power in both Rajasthan and Chhattisgarh; in the case of the latter, he has also promised to hike the MSP of paddy to a whopping Rs 2,500 per quintal, up 43% from the current MSP that was also a hike of 13% on the prevailing MSP. In Madhya Pradesh, Gandhi has promised a loan waiver for those with loans of up to Rs 2 lakh, linking the MSP to the Swaminathan formula—that is, the MSP will be 1.5 times all costs, not just the much-lower A2+FL costs—a Rs 1,000 monthly pension to all marginal farmers above the age of 60 and Rs 51,000 for the marriage of daughters of farmers with small land holdings. Given how angry farmers are with product prices continuing to remain low—even retail inflation in cereals has averaged just 2.7% over the last 12 months and that in pulses has been minus 14%—Gandhi may not be wrong to think his promises will catch the voters’ fancy.

The problem with such promises, apart from the fact that this forces other parties to come up with even grander ones, is that the voter simply doesn’t understand the consequences. As a related question, since fulfilling the promise is going to wreck the fiscal balances of most states, at some point the Election Commission needs to ask parties how they plan to fund them. What voters swayed by promises of loan waivers don’t get is the consequence of this is a sharp lowering in growth rates of farm credit. At Rs 10,54,400 crore at the end of September 2018, agriculture loans grew just 6% over that a year ago, and the figure was equally low in the year before that. By contrast, annual agriculture loan growth was 16% in the 2010-2016 period. This suggests that, once various politicians started announcing farm loan waivers, this encouraged farmers in other states to delay loan repayments and, due to this, bankers have become cautious about lending. Since farmers then have to borrow from informal sources, this is obviously a big cost that needs to be kept in mind.

Also, if the government is going to spend money on farm loan waivers, it is going to have that much less to spend on others areas like, say, building a rural road or a canal. High MSPs also cause other distortions. The kind of hike in paddy MSP that Gandhi is talking about will result in a lot more production of rice and, with this causing prices to fall, the government’s MSP burden will rise so much, chances are it won’t be able to fulfil its promise. Also, to the extent prices rise—that is, the government actually procures all production—this will, in turn, ensure that rice exports become uncompetitive; were the same promise to be made for cotton, this would ensure that even exports of textiles and readymade garments would get badly hit. So, at a time when what farmers really need is free markets and higher government investment in agriculture, what is being promised is more price controls via MSPs and less government investment. When the BJP promised, and delivered on its loan-waiver promise in Uttar Pradesh, Icrier professor Ashok Gulati pointed out that the size of the loan waiver was roughly equal to what the farmer lost out over three years by not getting the MSP that the government had promised to pay for wheat and rice.



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