Can Pro-Poor populism destroy Indian Economy?

This article is written after farm Loan waiver going on in country

Article By : Gaurav Kumar

Instead of competition in Investments and reform policies ,We are seeing competition in “Pro Poor Populism” among Indian states. Most of the states today are banking on freebies to secure their future votes. This seems normal from common point of view. But can this have disastrous impact on Indian economy in long-term? Lets first have a case study.Venezuela , was the richest country in south America till 2001, now it’s among the poorest. What changed?

First Let’s examine What have happened recently

  • The food shortages and violence have made the situation so miserable that people prefer to fly out of country. But wait. It’s not so simple to get out of the country.The passport agency have run out of plastics to laminate passports. you have to wait 8 months for that.Although bribing officials can make it easy.
  • Economy shrank 18.6% last year. Inflation was 800%.
  • IMF predicts consumer prices to rise 2200% percent this year.
  • The 100 Bolivar notes, highest denomination is worth less than 3 cents on black market.Shopkeepers prefer weighing it instead of counting.
  • Only 11 billion dollar left in foreign exchange account even though it is an oil exporting country.

So, what led this country to fall to this economic crisis which is leading to social and political crisis too, as faith in government has fallen to less than 23%.

 

venezuela

The important point to be mentioned is Venezuela has the highest oil reserves in the world.Venezuela have 297.6 billion barrels of proven oil reserves but produces only 2490 thousand barrels per day, whereas a small country like Nigeria have proven oil reserves of 37.2 billion barrels and produces 2524.1 thousands barrels per day.This shows having resources doesn’t make you rich , you have to properly use them.

After constant falling of crude prices from 120$ per barrels to 30$ per barrel the, oil-producing countries went into an economic shock, But they somehow managed to survive crisis.But the case of Venezuela was different. According to world bank report oil prices must remain above 100$ per barrel so that countries’ finances could survive.

venezuela

Venezuela had pro-poor populist government since 1999 to 2013. Populism seems very nice till you have money to distribute but in the long-term when the crisis hits, you get bankrupt.Instead of creating infrastructure and taking “competitive & free market” reforms, prices and production got controlled which can’t be reformed easily in near future.

Coming to the India’s Case.

India too had pro-poor populism since independence and have seen price and production control which is pro Socialistic policies and approach. We saw slogans like Garibi Hatao by Indira Gandhi which also led to distribution of money without creating Infrastructure.

Indira Gandhi

 

Although the crisis was in the making for a long time and we even saw it explode in 1991. This was the biggest financial crisis (Balance of payment crisis) for India. we had foreign exchange which could make up only 13 days of imports. So great was the crisis.!!

But anyhow, we came out of the crisis by taking crucial reforms like devaluation of currency, removing “trade,production and price” regulation,implementing LPG reforms , market based exchange rates and a lot of other crucial reforms. we almost started from scratch and now we have 380 billion dollars in foreign exchange. It can be said to be very big achievement for India.

 

rupee

But pro-poor populism started again in 2007. UPA government was sure that it was not going to win again. So they waived all the farmers loan worth 80000 crores. Although, the populism worked and they formed government again but this was the start of populism.

In the recent time what we see is –

Due to populism, Farmers in Punjab don’t have to pay for electricity for irrigation. This has led to over irrigation and soil salinization. The case is so severe that in some reports it is said that due to salinity, soil will be of no use after 15-20 years.

 

power

Discoms (electricity distributing companies) are mostly state-owned and have a huge pile of debts. Due to populism, whichever government will start charging for electricity to farmers, will fall in next election.

This have led to a feeling in villages that electricity comes free of cost and again this leads to over irrigation and less efficient appliances usage. Although government have come out with UDAY scheme to convert Discoms debt to bonds to reduce interest payment, but until populism stops, it will be of no use in long-term.

Farmer’s loan waiver by state governments.

This has become a fashion and trend nowadays . Which ever government wants to win election in a state, promises farmers loan waiver. The problem is when one state government waives loans, similar voices start originating from other states. we have recently seen in Uttar Pradesh, Maharashtra, Punjab etc.

farmer

Although this seems legit that they must be provided assistance , but it’s not that simple. Since the government waived off the loans, the willing farmers who were to repay the loans feel betrayed and will never ever pay loans back again. We saw agitation in Madhya Pradesh, in tamil nadu, Maharashtra , Punjab etc. This will grow even more in the coming days. The parties will have a fear that if they don’t waive off the loans and the opposition promises it in the next election, then they will have no chance to win again.

30000-40000 crores is not a small waiver. For reference Delhi government have annual budget of 37000 crores.

The money could have been used for irrigation infrastructure development. Most of the states instead of building good canal infrastructure, micro and modern irrigational facilities , see loan waiver as easy way of populism.

This will surely lead to disastrous impact in coming future. As my friend Sweta Sinha, Who is also a banker, describes farmers are no more willing to repay their debts as they have a feeling that sooner or later some government will waive off the loans for vote bank. When banking officials visit for loan recovery, they simply refuse. If the bank takes harsh way for recovery, political pressure manages to stop them.

When Banks are already struggling with high NPA’s and fewer profits, this “pro poor populism” is leading to even more pressure on them. They can’t deny the loan due to priority sector lending rule and they can’t recover back due to government populism. This is leading to more losses and banks are not able to take decisions independently.

debt

Although India’s case will not be same as Venezuela in immediate future, but who knows if something bad happens to country like 2008 crisis , then we may never have high growth rates again as the growth rates also depend on the ability of banks to give loans. If banks are not able to give loans at low-interest due to high NPA’s, it will lead to less industrialisation and slow recovery. Even Brazil was seen as future economic powerhouse but due to populism, corruption etc they are in recession.

So it’s the need of hour to have proper policies and avoid this trap before it’s too late.

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