It is too early to say if the Rs. 60,000 crore budget bonanza for the cash starved farmer is going to boomerang on the UPA. Cold statistics has taken away much of the euphoria created by the whopping loan waiver.
But the Finance Minister has a separate agenda. He is not very explicit about it; though a close reading of the Economic Survey 2007-08 will reveal the game plan. It is difficult to believe that a government entirely dependent on the CPI (M) support has the gumption to go ahead with these sweeping banking sector reforms. Perhaps, the Left in the glory of sharing power has no time to study the fine print or has willfully overlooked the subject. Except for financial journalists not many people bother to read the Economic Survey, though it is one of the most authentic documents on government policy.
This year'sEconomic Survey, unlike in the past has a separate chapter on the government'splans to focus on reforms. After the usual opening chapter on State of the Economy, the Survey in the second chapter discusses the challenges, policy response and medium term prospects for sustaining the growth with an analytical exercise highlighting priority sector reforms. There is a hint of this in the Finance Minister'sbudget speech. A perusal of both makes it clear that the waiver was announced not so much to benefit the farmer but to further the immediate goal of bringing 100 per cent Foreign Direct Investment in the rural sector. To bring in FDI is it necessary to kill the Indian rural banking cooperatives? It is true, 73 per cent of the rural indebtedness is with private moneylender. But is there any guarantee that the 100 per cent FDI Greenfield Private Rural Agricultural Banks, the Finance Minister is planning to bring in will be less cruel with the poor farmer?
The Survey says, ?the Indian economy has moved to a higher growth path. The new challenge is to maintain growth at these levels, not to speak of raising it further to double-digit levels. With domestic experience of such high growth limited, global experience can be useful? The challenges of high growth have become more complex because of increased globalization of the world economy and the growing influence of global developments, economic as well as non-economic.? This chapter identifies some of the major policy challenges at the macro and sectoral level and analyses the medium-term prospects of the economy. To sustain the growth rate the survey has identified the following set of reforms in the finance sector.
Retail FDI: Allow a share for foreign equity in all retail trade. Allow 100 per cent foreign equity in foreign branded, specialized retail chains (e.g. Luxury Brands, Consumer Durables, Semi-Durables).
Insurance: Raise foreign equity share in Insurance to 49 per cent. Allow 51 per cent foreign equity in a special category of insurance companies that provide all types of insurance (e.g. health, weather) to rural residents and for all agricultural related activities including agro-processing.
Banking: Allow 100 per cent FDI in Greenfield Private Rural-Agricultural Banks. Such a bank would be free to set up any number of branches in any rural or semi-rural area. It would be free to lend to agriculture and allied sectors, agro-processing and agro-input industries anywhere in the country and to any industry located in non-urban area (negative list). Such a bank would also be free to takeover (buy out) other private sector banks. As an incentive, such a bank could be allowed expansion into small towns when the general FDI policy on banks will be liberalized.
Here I am dealing only with banking with particular emphasis on rural, agro banking.
It is intriguing as to why the Left parties are silent about this aspect. Either they have not bothered to study the survey document or they are convinced that this government will not last to implement them. But the waiver conspiracy has done the damage, if not totally destroy the cooperative sector. A cynical gamble to facilitate the unhindered entry of Greenfield Private Rural Agricultural Banks to dominate the Indian farm sector. How is it possible? If the Finance Minister'sclaim of Rs. 60,000 crore loan waiver is taken at its face value then, according to official estimate, cooperative banks account for Rs. 35,000 crore. The share of scheduled commercial banks and rural regional banks account for only Rs 20,000 crore.
Many states have already expressed their apprehension about the health of the cooperative banks and the strain the waiver has already put on them. Now, the FM is saying that part of the burden will be borne by the state. The state ministers handling the cooperative sector say that they have received no indication as to where the money is coming from to replenish the finances of these institutions. In the ensuing melee in rural India the foreign financial institutions will enter and thrive freely buying up farm land, establishing commercial complexes and destroying agricultural economy as part of the reform agenda.
The ultimate result of the loan waiver as it is conceived now is that the cooperative banks, which are to bear the biggest chunk of the waiver loss will be saddled with loans that they will never collect. These non-performing assets in the absence of funds to recapitalise these banks will force their liquidation. This may not happen, in the normal course. But the vague budget announcement, which is to give government guarantee as for the principal and interest does not offer instant liquidity which these banks will badly need. Immediately, these banks will face huge dent in their profit and loss account and problem of solvency. And what will happen to millions of farmers in rural India who have banked with the village cooperative banks? This will spell the death-knell for rural cooperative banking in India.
The government is supposed to replenish the banks with sovereign guarantee. But this is to happen over a period of three years. With the small loan defaults normally the banks could trouble the farmers who in any case have an excellent record of repayment and the balance sheets of these cooperative banks did not show the stress. The negative consequence of this solvency problem is that the rural banks will become defunct leaving the field wide open for foreign players to enter and manipulate rural farm sector. This is a dangerous ploy. If the rural cooperative banks are not bailed out immediately with plans to recapitalise them we are in for a major crisis than what has been witnessed so far. If the Finance Minister has any real plans to recapitalise the cooperative banks he has not revealed it so far. In 2006, the Prime Minister had announced in the face of farmer suicides a relief package for 31 districts in Andhra Pradesh, Maharashtra, Kerala and Karnataka. But in the last two years the government could not make use of the package or stop incidents of farmer suicides. Hence Chidambaram'sclaim to execute the present write-off in three months is bogus. He has other plans.
(The views expressed in this column are personal. The writer can be contacted at [email protected])