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It was always considered bad economics to bail out India's millions of beleagured farmers, but swift government bailouts for the banks are considered a political necessity. ‘Where will the money come from?’ is not a question to be asked when you are subsidising the rich and the elite, says Devinder Sharma.
13th October 08 - Devinder Sharma ~ STWR
In India, it didn’t hurt when the farmers
were dying. Over 200,000 farmers have committed suicide in the past 15 years,
and more than 40 percent of India’s 600 million farmers want to quit
agriculture to look for menial jobs in the cities.
The national media kept quiet.
Now that the markets are crashing, the media is
up in arms. “Act fast, go big. It is not only about bulls and bears
anymore. It’s about India. And it’s hurting,”
says a lead story in a national daily. But it didn’t hurt when the farmers were
dying.
There is blood on Dalal Street (India’s
Wall Street). Yet throughout all these years we refused to acknowledge that
farmers were dying, and agriculture was bleeding. Farmers are children of a lesser God, it seemed,
who do not belong to India. They only live in Bharat, the countryside.
Just a few months back, when the day
Finance Minister P Chidambaram in his budget speech announced a Rs 60,000-crore*
loan waiver for the beleaguered farming community, there was an orchestrated outcry:
“Where will this money come from?" Television anchors were visibly angry at
this supposed ‘windfall’ for the farmers, the print media was outraged at this
‘political and not economic’ decision just before the ensuing elections, and
the industry leaders were seen sulking.
Six months later, no one is asking the same
question. With the global financial crisis failing to work itself out, the
Reserve Bank of India (RBI) is under pressure to intervene. Soon after the Wall
Street mayhem, the RBI had pumped in Rs 84,000-crore in the domestic banking
system through liquidity facility adjustment. An additional Rs 20,000-crore has
been released through a 0.5 percent reduction in a cash reserve ration (CRR),
to be further slashed by 100 basis points. It took RBI five years to make the
first cut in CRR on Monday, and the next cut comes five days later. That sure
is some urgency.
Sounds technical, but let me simplify. Liquidity
in layman terms means ‘fund availability’ or, in simple words, making available
more cash. All over the industrialised world, governments are stepping in to
provide more cash in the hands of the private banks, and India is no
exception.
Despite the Finance Minister saying that
the fundamentals are strong, the banks are on a massive borrowing spree. In the first
week of October alone, they borrowed Rs 90,075-crore every day from RBI through
liquid facility adjustment. In the days to come, the RBI is under pressure to
release another Rs 30,000-crore through the CRR, and also to cut the repo rate
– the rate at which it lends to banks. And thanks to the loan waiver, the banks
will receive another Rs 50,000-crore in the coming weeks as part reimbursement
for the farm loan waiver and fertiliser loan.
Isn’t it a fact that Rs 60,000-crore loan
waiver (later enhanced to Rs 71,000-crore) was actually a relief to the banks? What
seemed to be a ‘political’ decision in the name of pulling out the indebted
farmers was actually meant to maintain and sustain the health of the banking system.
If the government had not provided the loan waiver, banks would have been in a terrible
liquidity crisis. With farmers unable to repay, these banks would have been saddled
with massive non-performing assets (or a shortfall in liquidity) or non-availability
of Rs 71,000-crore in cash.
In other words, the loan waiver was a
partial bailout for the banks. Now no one is asking: “Where will this money
come from?” On the contrary, most analysts are asking for more ‘speed and
sagacity’ to tide over the crisis. The industry has already demanded a bailout
package of Rs 100,000-crore.
If only such ‘speed and sagacity’ was shown
to tide over the terrible agrarian crisis sweeping throughout the country for
over a decade now, thousands of farmers would have been saved from committing
suicide. If only the RBI had stepped in to make more cash (or liquidity)
available, the nation could have easily provided an assured employment to each
and every Indian, not only for 100 days but for all the 365 days in a year. The
National Rural Employment Guarantee Programme (NREGA) can be easily extended to
bring every unemployed Indian under its gambit.
It is here that I fail to understand the
sagacious logic of keeping the poor hungry, and then expecting a higher
economic growth trajectory; of paying a multi-million dollar salary (in
addition to lucrative perks) to the bosses of the banks and corporate houses,
and then to make the man on the street pay for the losses; in other words, the
logic behind privatising the profits and socialising the losses.
Take the case of the bankrupt Lehman
Brothers. While the shareholders in the company have been wiped out, Richard
Fuld, its chief executive, walked away with US $480 million as his personal
remuneration over eight years, which includes a $14 million ocean-front villa
in Florida, and a home in an exclusive ski resort. Lawmakers investigating the
bailed out insurance company AIG were shocked to learn that days after the
government rescued the company, it unashamedly spent US $44,000 on a posh
California retreat for its executives, complete with spa, banquets and golf
outings.
Why blame the American corporate leaders
when US president George Bush himself had given them a free rope: “Government
should not decide the compensation for America’s corporate executives.” What he
probably meant was that come what may, the US government will continue to provide
funds to meet obscene corporate salaries and perks.
Prime Minister Manmohan Singh had also removed
the upper ceiling on corporate salaries. According to Merril-Lynch and
Capgemini, driven by impressive economic gains and robust market capitalism
growth in 2007, India led the world in high net worth individual (HNWI) population
growth at 22.7 per cent. Two year earlier in 2005, there were 83,000 high net
worth individuals with a wealth of at least $1 million (without including
immovable property). And you guessed right - the number of millionaires has
gone up quite considerably in the meantime.
This brings me back to the same question.
How long will the world go on encouraging an economic system that makes the
rich richer and the poor poorer? While 36 billionaires in India have a
collective economic wealth equivalent to one third of the country’s GDP, the
country’s 600 million farmers collectively account for only a 17 percent share.
With every passing year, the share of agriculture in GDP continues to slide
down even further.
The average monthly income of a farm
household (which includes five members of a family and two cattle) does not
exceed Rs 2,400 (US $60). The value
erosion in real farm income over the past few decades has never been discussed,
but the erosion in paper wealth of shareholders is being projected as a
national disaster.
Bailing out the farmers from a distressing
situation is always considered to be bad economics. It is branded as a
political compulsion, and the sooner politicians emerge out of it the better it
is supposed to be for economic growth and development. This economic prescription,
which every economist worth his title is willing to endorse, is invariably given
for the farming community, the landless workers and the marginalised
communities. They need to learn to be enterprising, is the assumption, and therefore
must stop living on government subsidies.
But when it comes to the enterprising
millionaires - corporates and leading bankers - government bailouts are not
only a must, but should be done speedily. ‘Where will the money come from?’ is
not a question to be asked when you are subsidising the rich and the elite. That,
we must understand, is their birth right.
Devinder Sharma is a New Delhi-based food and trade policy analyst.
He is a regular contributor to STWR and can be reached at
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* one crore = 10 million
STWR articles by Devinder Sharma
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