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Chidambaram: Reformer or deformer?
March 03, 2008
"The root cause of the current crisis is not indebtedness alone -- indebtedness is just a symptom. The underlying causes are stagnation in agriculture, increasing production and marketing risks, institutional vacuum and lack of alternative livelihood opportunities." -- The R Radhakrishna Committee report on agriculture indebtedness.
And, in one stroke, by his proposal to treat the symptom instead of treating the disease, the Hon'ble Finance Minister P Chidambaram, the darling reformer, has instantly turned into a dangerous deformer.
In the process he has set a new high (or is it a new low?) for political populism and fiscal irresponsibility.
Effectively, in one stroke, he has endangered the solvency of banks, damaged irreparably -- and perhaps permanently -- the credit worthiness of our farmers as borrowers, exposed the hard-earned depositors' money to such reckless treatment in future by his successors and, of course, dented the assiduously built financial discipline of our banking sector.
Nevertheless, one has to see the proposal of the Hon'ble finance minister to write off approximately Rs 60,000 crore (Rs 600 billion) of farmers' debt in the context of an unprecedented and gargantuan financial crisis that has engulfed our farm sector.
This crisis had seriously debilitated our farm sector and has been responsible for the successive wave of suicides in every part of the country over the past several years. Surely, desperate times do call for desperate measures. These proposals have to be viewed in this context.
Experts have been consistently warning the nation and the policy-framers of the continued neglect of the farm sector. Yet one notes with great regret that these warnings have fallen on deaf ears over the years.
Be that as it may, one sees this move by the Hon'ble finance minister as the last ditch attempt of a desperate establishment -- bankrupt, both in ideas and ideologies -- to deal with the extant problem.
While this write-off seemingly addresses the crisis within the farm sector, the fact of the matter is that it has not been able to address the root cause of the problem: the structural issues as sought by the R Radhakrishna Committee report.
It is also murkier at this point in time as who would foot the bill for this waiver -- the government or the banks? Crucially, what is the amount of 'overdues' in our banking sector? Is it as high as Rs 60,000 crore as mentioned by the finance minister? And how is going to tackle the liquidity, profitability, solvency and capital adequacy issues of the entire banking sector all at once?
And till these issues pertaining to the farm sector are addressed pronto, one is of the opinion that we may have to revisit this idea of debt-waiver once again in the none-too distant a future.
Cat on a pilgrimage?
This desperate gamble of the finance minister is akin to the cat that goes to a pilgrimage after killing the mice, a mere atonement for the sins of neglect of successive governments -- nothing more, nothing less.
Nevertheless, it has to be noted that one is of the opinion that the relief package of the finance minister is only for those within the farm sector who had the good fortune of approaching the banks for financial assistance. It is in this connection the R Radhakrishna Committee report had stated that only half of the farmer households were indebted.
And amongst those who were indebted, only three-fifths -- i.e. approximately a mere 30 per cent -- of the total farming community, owed money to institutional sources. It is to this group that the Budget seeks to provide succour through the waiver. Needless to emphasise, the remaining 70 per cent would continue to commit suicide for two reasons -- lack of credit or that the interest rates from loans contracted from private money lenders are at usurious levels.
One is also unable to reconcile to the apparent contradiction contained in this proposal of the finance minister -- on the one hand he has been championing the cause of privatisation (to the extent of even allowing foreign ownership) of our banks and, on the other, issues fiats to these banks to write-off such loans as if they are still totally controlled by the government.
Will this singular act not derail the global integration process of India with the global economy, torpedo financial sector liberalisation and collapse the stock markets?
One is forced to remind the finance minister that our banks have long lost their character as a public sector enterprise. Hence, in the absence of a clear compensation package to the banks, this proposal sounds financially hollow, morally repugnant and politically dangerous.
Yet, old habits die hard
After all this, one hoped that the nation will learn appropriate lessons from the heavy price it had to pay, financially or otherwise. Even as the Budget was treating the symptom, it seems to have ignored the disease confronting the farming community.
Instead of concentrating on farm sector at least from now on, making a significant step-up in allocations and ensuring concomitant achievements, the budget seems to be oblivious of the systemic deficiencies of our farm sector. It would seem that old habits die hard.
It is in this connection one is also intrigued by the strange approach of the finance minister in suggesting that state governments (including West Bengal) should approach multilateral agencies -- like the World Bank -- and seek financial assistance for the completion of irrigation projects. This is nothing short of abdicating responsibility and outsourcing fundamental duties of government.
Much ado about nothing
On the allocations made in the Budget, in direct contrast to the visible excitement displayed by the finance minister, one is not at all excited.
This is primarily for two reasons. The total increase in the social sector outlays more or less corresponds and approximates to the broad increase in the revenue of the central government. Needless to emphasise, any stepped-up allocation made to a particular sector has been more or less compensated by a corresponding decrease in another.
Secondly, I have consistently been worried about the quality of governance that is crucial to effectuate these schemes. Given the disarray within the United Progressive Alliance partners, their track record and the overall indifference of our bureaucracy to the poor, one is equally worried that these well-intentioned outlays of the Budget may not eventually get translated into outcomes.
Equally, one is sceptical of the potential of this Budget to generate employment, controlling inflation, build infrastructure and generate purposeful employment.
Be that as it may, one is also worried that while various sectors have seen increased outlays, the defence sector has seen only a meagre increase of 10 per cent. With the country facing serious security threats from across its entire borders, one hopes that national security has not been compromised at the altar of fiscal orthodoxy.
On the taxation proposals, one welcomes the cut in Excise duty and increase in exemption limits under the Income-Tax Act and for service providers, from service tax, up to Rs 10 lakh (Rs 1 million) from the present limit of Rs 8 lakh (Rs 800,000).
Further, it is hoped that the steeper cuts effectuated for certain industries notably for two and three wheelers is also appreciated in the light of the turbulence faced by these industries for the past few years.
Finally, I am apprehensive about another proposal contained in the Budget with respect to allowing exchange-traded currency and interest rate futures in the credit derivatives markets.
I view these proposals as obnoxious. Experiences over the past few years with other such instruments in the financial markets have taught us that these are fundamentally wagers packaged in exotic language, complicated rules and complex accounting.
It is interesting to note that virtually every corporate in India has established a treasury department -- to deal in such exotic products. One is unable to understand why a software company or a manufacturing company, for instance, have a treasury department and carry on such mindless speculation?
What the Budget seeks to do is to legitimise these contracts in India.
This is strange when banks, not so long ago -- as a matter of prudent policy -- never had any uncovered forex position. While one can understand an exporter on an importer taking a forward contract to the hedge their outstanding, the fact of the matter is that many corporates in India seem to indulge in these transactions with a complete disconnect to their legitimate requirements.
It also been reliably learnt that such contracts till date are illegal in India and Indian corporates have used the London route to enter into these contracts.
Experts as Dr S Narayanan, former economic advisor to the Prime Minister of India, have opined in a post-Budget meeting in Chennai that it is these derivative instruments that are at the root of the present sub-prime crisis in the United States. Is the Budget paying way for an Indian sub-prime crisis?
Finally, one notes that budget figures do not capture the possible implementation of the Sixth Pay Commission. Needless to emphasise, as and when the government proceeds to implement the same, these Budget figures would go for a toss.
Crucially it may trigger an across the board wage concomitant increase for state government employees, PSUs, banks and other related organisations. As and when it happens it is bound to have an inflationary impact on the national economy.
To conclude the Budget suffers from latent revenue deficit and fiscal deficit and blatant transparency deficit, honesty deficit, intellectual deficit, policy deficit and ideology deficit.
The author is a Chennai-based Chartered Accountant. He can be contacted at email@example.com
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