Populism, short-termism will hurt farmers in long run

‘Populist’ (in the sense of appeasing a large number of voters) policies are not necessarily bad. But, even then, what is good in the short run may run counter to the interests of the same group of people in the longer term. In other words, a policy may be good or bad depending on the time horizon taken into account.

It is unfortunate, though understandable, why in India, short-termism, rather than the longer term interests of the people, is increasingly dictating policy-making. In the early years after independence, one single party, the Indian National Congress, ruled at the Centre as well as all the states. Many ruling party politicians (and opposition leaders) had built up their reputation and political base by making personal sacrifices during the freedom struggle.

As voters had faith in their integrity and judgement, these leaders could afford to look beyond the immediate electoral cycle. National policies like SC/ST reservation were genuinely meant to correct the ill-effects of past discrimination against such people. Their purpose was not to build vote banks for themselves. With very low per capita income and mass poverty, subsidies on food, fuel, fertiliser, irrigation water, medicines and education were for necessary for the basic survival of most people. These leaders did not have to primarily rely on distribution of freebies like money, liquor, mixies and TV sets to win votes.

The situation changed over time as different political parties and opportunistic coalitions of parties and independent candidates began to rule in different states. Many of these second-generation leaders, including local toughs with money and muscle power, did not have a solid voter base that could assure victory for them on the basis of their past reputation or social work. The voters had little faith in their electoral promises of local development. Also, it was not clear who would get the most benefits (like jobs or contracts) from a local area project. Consequently, many politicians had to win elections by providing immediate benefits that voters could see.

Elections became contests of freebies and assurances like loan waivers, extending reservations and legalising illegal occupation of pavements and public land. After all, a vote swing of even a few percentage points determines the winner in a multi-party contest.

If we look at the results of the recent elections in several states and the promises made by different political parties both before and after the results, the same factors seem to be playing an important role. Developmental and governance performance of incumbent governments have gone to the backburner. Immediate farm loan waivers, quotas to newer classes of people and building a Ram Mandir at the earliest, irrespective of the Supreme Court verdict, have become the vote-catching promises.

Debt forgiveness

The promise of debt forgiveness to farmers is a particularly interesting one. According to most, if not all, economic analysts, negative longer term disincentive effects (debtors would not repay any debt in expectation of further debt forgiveness, and banks would cut back on loans to farmers, which would eventually hurt the farmers) would outweigh any immediate positive effects. This has been in evidence in cases of loan waivers in the past.

It is, therefore, surprising that Nobel-winning economist Prof. Amartya Sen, said in a recent interview: “I don’t take the view of some, saying that the loan waiver is a completely wrong thing. It has an incentive problem certainly, but many equality policies do have an incentive problem.” He then gave an example, drawing from his own experience in Rabindranath Tagore’s Santiniketan, to substantiate his case for loan waiver. He believes that indebtedness has forced tribal land-owners around Santiniketan to sell their land and hence a loan waiver would have averted this inequity.

Though Prof. Sen’s point about the possible conflict between efficiency (or incentive) and equity in many policy initiatives like progressive taxation is generally valid, his Santiniketan example in the context of recent loan waivers is flawed.

Basically, cultivation has become less profitable (if not absolutely unprofitable) relative to selling land to real estate developers. That was not the situation in Prof Sen’s earlier days in Santiniketan. The reality is different now. Santiniketan has become a favourite place for a second home for a lot of affluent Bengalis. If, as Prof. Sen is argues, debt has forced the erstwhile tribal land-owners to sell their land, it should have been a problem in Sen’s early days in Santiniketan, too. But earlier, the tribals had no other option but to cultivate land. There was no big demand for residential housing in those areas.

Even if we assume that the tribal land-owners were suffering due to debt burden, a one-time loan waiver is not going to solve their problem. Also, remember that the official loan waiver applies to only bank loans, to which most tribal farmers do not have access. They mostly depend on loans from local money lenders. Anyway, if the underlying causes are still present (like very small and fragmented land-holding, low productivity, non-remunerative prices, etc.), the tribal farmers would be running into debt again, despite a loan waiver. Their land would eventually be sold to land developers willing to pay a sufficiently attractive price.

Just think of the case of erstwhile farmers in Gurugram. They were not indebted tribals or very poor farmers. Many of them have become millionaires by selling their agricultural land to real estate developers or industrialists (only after such opportunities cropped up in that area) and their annual return from investing the sale proceeds of their land is many times more than the return from agriculture. Hence, unless agriculture remains or is made more remunerative than alternative uses of land, agricultural land will be eventually sold/used for other purposes wherever such opportunities exist. Loan waiver to farmers is no solution to this basic problem.

(The writer is a former Professor of Economics, IIM Calcutta)