A Committee headed by Nachiket Mor, a member of RBI board to draw up a plan for overhauling the Indian banking landscape has recommended that ‘banks must be required to freely price farm loans on the basis of their risk models and any subvention’
And, waivers deemed necessary by Government should be transferred directly to farmers and not through interest subsidies or loan waivers. Farm loans should not be priced below base rate.
This recommendation clearly acknowledges that grant of loans to farmers at concessional interest rates or loan waivers distorts credit markets and results in sub-optimum utilization of funds. It also results in reduced availability of funds to other sectors.
Besides, cost of credit to non-farm sectors is higher as banks are forced to cross-subsidize credit on concessional terms to farmers. Loan waivers dent balance sheet of banks. They are still feeling pricks of 2009 massive onslaught worth Rs 50,000 crores.
All this is well known. But, the moot question is will this be accepted? Will RBI implement this recommendation? And, even more important, will Government allow it to go ahead?
The issue is ‘generic’ to very art of policy formulation in India. It connects with the way Government wants to give subsidies to the poor and other vulnerable sections of society. It cuts across all sectors of economy and is not limited to interest subsidy alone.
To help majority of poor, for decades, Government has been giving subsidy on food, fertilizers, LPG, diesel, kerosene, power supply to farmers, seeds, credit etc. And, manner of administration in all these cases is to make suppliers/manufacturers to sell products at prices lower than full cost price or market price.
Thus, Food Corporation of India (FCI) and other agencies involved in supply and distribution of food grain and implementation of welfare schemes sell food to target beneficiaries at low price. The Government compensates them for differential as subsidy.
In fertilizers, central Government directs manufacturers of urea to sell to farmers at a low ‘notified’ price. The excess of cost of production & distribution is reimbursed as subsidy to them. Producers of complex fertilizers get subsidy at fixed rates who then, are required to lower sale price by that much.
In case of LPG, diesel, kerosene, Government owned oil refinery & marketing companies viz., IOC, HPC & BPC sell these products at prices regulated by Government (albeit informally, as technically these products are decontrolled). These prices being lower than cost, they incur ‘under-recoveries’. These are met partly from subsidy and balance by way of discount on crude sale by upstream oil & gas majors viz., ONGC and OIL.
As regards seeds, state governments arrange for their supply through their respective seed corporations to farmers at subsidized rates. Funding for these comes from state budgets supported by flows from Government of India under centrally sponsored schemes.
On power front also, state electricity boards (SEBs) and power distribution companies (PDCs) are directed to give electricity at highly subsidized rates (or even free) to farmers and poor households. Resultant under-recoveries are made up either through cross-subsidy from sale to industries & businesses at higher rates or subvention from states.
In regard to credit, commercial banks and regional rural banks (RRBs) make credit available to farmers at concessional rate of 7% for crop loans. Farmers who return loans in time, get an additional concession of 3%. Besides state subvention, a portion of cost is absorbed by banks.
All these subsidies which aggregate to well over Rs 500,000 crores (US$ 80 billion) annually and are administered by controlling sale price of products at ‘artificially’ low levels lead to serious distortions in market place, leakages, widespread corruption and huge wastage of public money.
Thus, we have diversion of subsidized food grain to market where dubious traders fetch much higher prices; such diversion may be well over 50%. Nearly 30% of urea finds its way for non-agricultural uses at much higher prices. There is also large-scale smuggling to neighboring countries where urea is not subsidized.
In the petroleum sector, diversion of subsidized kerosene for mixing with diesel is rampant. Even within diesel, even as bulk buyers are required to pay the full market price, they buy most of their requirements from retail which is heavily subsidized. LPG subsidies are any way cornered mostly by non-poor.
In case of power, seeds and credit too, there is reckless mis-appropriation subsidy by large/rich farmers.
The biggest ‘negative’ is that the extant dispensation gives wrong price signals and scuttles development of competitive and efficient markets. No manufacturer/supplier has an incentive to cut cost as either he gets compensated under relevant price scheme or has easy option of subsidized material available to do good business.
Research & development takes a back seat as there is no incentive for coming up with innovative solutions, improvement in efficiency and better delivery practices & methods. All stakeholders want to make a quick buck under a subsidy dominated regime.
The Government is well aware of all the drawbacks of extant dispensation. To minimize leakages and inefficiencies, bring competition in to full play and save resources to help fiscal consolidation, it decided in January, 2013 to give all subsidies directly to beneficiaries in place of extant system.
It even started pilot projects in select districts for kerosene, LPG, fertilizers and food. In LPG, it has run a project covering 184 districts since June, 2013 making Rs 1700 crores of subsidy transfers to around 18 million customers. In fertilizers also, a pilot has been successfully run.
Yet, Government has given no firm indication whatsoever as to when it will implement the direct benefit transfer (DBT) in any of mentioned areas. In food, it is going ahead with implementation of Food Security Act (FSA) through existing system only. That means a quite burial of DBT.
In this backdrop, to expect RBI/Government accept and implement recommendation of Mor Committee for direct transfer of interest subsidies or loan waivers looks to be a pipedream!