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Economy Mar 6, 2013

Compared to 2G, farm loan waiver isn’t even a scam

By R Jagannathan

It is tempting to label any report put out by the Comptroller and Auditor General (CAG) as a scam. But unlike its reports on 2G spectrum and coal block allocations (Coalgate), the CAG report on the UPA's farm loan waiver scheme is not indicative of a scam.

This is not a report the UPA should get apoplectic about, nor anything for the opposition to salivate over. The scheme more or less achieved its social purpose - of providing debt relief to small and marginal farmers - and also its political purpose, which was to give the Congress party an edge in the 2009 elections.

What the CAG report uncovers is the systemic flaws that partially neutralised the objectives of the scheme - and this is not something unique only to UPA schemes. If anything, the Congress should brandish the report to show low the element of scandal really was in this scheme.

The "scam" element is nowhere near the Rs 1.76 lakh crore reported in 2G or Rs 1.86 lakh crore in Coalgate; if at all one should put a figure to it, by projecting the CAG's negative observations from its sample audits to the whole scheme, the total amount involved in "lapses" would be around 22.32 percent. Given the Rs 52,000 crore spend on the scheme, the amount involved would be around Rs 11,600 crore, the lapses were extrapolated to the entire universe of beneficiaries. Little of it can be equated to graft.

This is what CAG did and what it found out.

The scheme, intended to provide 4.29 crore small and marginal farmers either with complete debt writeoffs or a one-time settlement of dues, was implemented in 2008-09, just in time for the Congress to benefit politically from it.

The auditor sampled 90,576 beneficiaries in 25 states and 92 districts to come up with a report on how the scheme was implemented or mis-implemented. And this is what it found.

One, 13.46 percent of those found eligible for debt waivers did not get them. This is a problem of exclusion, and the worst you can say is the UPA's commitment to inclusion didn't work here.

Two, 8.5 percent of those who got waivers were not eligible for it. This is where the scheme has the whiff of a scam, but it is not huge. Even when extrapolated over the entire Rs 52,000 crore writeoff mentioned by CAG, the amount involved would be around Rs 4,420 crore. Peanuts, compared to 2G or CWG or Coalgate.

Three, in 6 percent of the cases, or 4,826 checked accounts, farmers were not given their waiver entitlements correctly - 3,262 cases got "undue benefits" and the rest got less than they were entitled do. Undue benefits certainly reek of a smallish scam or bad implementation.

Four, banks and institutions made hay by claiming things they were not entitled to. For example, CAG found that in some cases the lenders did not incur any interest costs, but they still claimed reimbursements from the centre.

Five, the lenders did shoddy paperwork in helping farmers. If the main purpose of the scheme was to write off farm loans and make them eligible for further borrowings from banks, CAG found that banks did not give debt-relief certificates to 34 percent of farmers in order to entitle them to further loans.

But the real problem thrown up by the CAG report lies not in its main conclusions, but in what one can infer from the figures presented.

CAG figures show that Andhra Pradesh (Rs 11,354 crore) and Maharashtra (Rs 8,951 crore), two Congress-ruled states, apart from Uttar Pradesh (Rs 9,095 crore) were the biggest beneficiaries from the loan waivers. Congress won both Andhra Pradesh and Maharashtra (in partnership with NCP), and made unexpectedly huge strides in Uttar Pradesh.

Forty-five percent of the eligible loan waivers (here the CAG mentions Rs 65,318 crore and not Rs 52,000 crore) went to these three states.

But here's the real issue to investigate. Andhra Pradesh, as the biggest beneficiary, gave birth to the next localised financial crisis - the microfinance boom and subsequent bust soon after the loan waivers of 2008-09.

Did the centre's loan waiver contribute to the buildup of MFI exposures and subsequent collapse? Did MFIs use the scheme to recover their own dues?

Did the centre's loan waiver contribute to the buildup of MFI exposures and subsequent collapse? Did MFIs use the scheme to recover their own dues?

Andhra Pradesh has been over-penetrated by microfinance institutions, and by 2006 over 85 percent of microfinance beneficiaries were recipients of multiple loans.

As loans were turning bad, microfinance institutions were using strong-arm methods to recover loans, and by 2010 the Andhra government, rattled by a spate of farmer suicides, imposed an ordinance to restrain microfinance institutions (MFIs). By 2011, the Andhra microfinance boom story was over.

Connect the dots, and this is what needs further research.

Andhra Pradesh farmers received the highest amount of loan waivers (Rs 11,353 crore) in 2008. This enabled them to raise more loans from banks, but the waivers would have enabled them to also raise more from MFIs - thus creating a further buildup of loan burden that led to the final MFI bust in 2010-11.

Under the Centre's debt waiver scheme, loans extended by microfinance companies were not eligible for waivers. But this is what CAG says: "During audit in five states (Andhra Pradesh, Chhattisgarh, Odisha, Tamil Nadu and West Bengal), it was noticed that a private scheduled commercial bank have received reimbursements for loans extended to MFIs."

The questions to examine are the following:

Did the centre's loan waiver contribute to the buildup of MFI exposures and subsequent collapse? Did MFIs use the scheme to recover their own dues? Given that Andhra and Maharashtra were the biggest beneficiaries, was the loan waiver scheme hijacked by Congress politicians in these two states?

More important from a systemic viewpoint, do extensive loan waivers create a moral hazard for further overborrowing and defaults?

by R Jagannathan

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