Global Policy Forum

The Question To Be Asked: "Where Will the Money Come From?"


By Devinder Sharma*

Share the World's Resources
October 13, 2008

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.

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.

About the Author: About the Author: Devinder Sharma is a New Delhi-based food and trade policy analyst.

* one crore = 10 million

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