Monday, March 10, 2008

Indian budget

One of the biggest financial events in India is its annual budget. What is supposed to be a dull event of displaying numbers and fact, has been colored by successive Indian governments who use it as a pulpit to throw out doles to the hungry public. So, it is an event that is well televised and watched by Indian public with as much intensity as they would watch if India were playing finals of a Cricket WorldCup.
Mr. Chidambaram, Indian financial minister, who has delivered some progressive budgets in the past has come with a horrible political budget this year that will increase the debt burden and slowdown the economy in the future. The idea is clear - the government doesnt want to repeat its previous government's mistake of not taking the fruits of development to the poor and thereby loosing the election. So, what Mr. Chidambaram tries to do is play a bunch of tricks and hoodwink the people into thinking that the development reaches poor. So, instead of using reforms, investment and development to reduce poverty, the finance looks to remove poverty by throwing out rupee notes from the air. It looks as though Indian government is counting that this past 2 years magic will continue forever and fail to realize that what works at the peak of a cycle doesn't work at the end of the cycle. Instead of leading into progress, this budget can lead it into darkness. Indian government seems to hace reneged its promise of cutting down fiscal deficit (gap between governmental borrowings and earnings) and will add further debt to an already indebted nation (public debt at 60% of GDP, compared to 18% in China) The government seems to gone back to its socialist era that has brought so much pain and agony and made India a third world nation that had horribly lagged behind its Asian peers.

One of the biggest features of the budget is a Rs.600 billion write off of debts to small farmers. Ostensibly this is to reduce the number of suicides that has increased to very high levels in the last decade. Why the writeoff is bad:
-- It mainly targets farmers with very small land holdings (around 1 hectare). However, suicides mainly happen among cotton farmers who have fairly bigger holdings (around 10 hectare).
-- There are hardly any cases of a farmer committing suicide due to the inability to pay a government bank. Most of the suicides come from taking loans from loan sharks, and they are not going to write off the loans. Given the shallow penetration of Indian banking system, writing off bank loans and freeing up process for them to take more loans might not change ground conditions of the farmers much.
-- Any kind of a write off is morally wrong. Those hard working honest people who repaid the loans will be punished at the cost of the dishonest faulters. In the future, even the honest people will be forced to postpone or not repay the bank loans, and deliquencies will raise. Already, most rural people see bank loan more as a charity than something to be repaid.
-- Principally this makes India more socialistic and that itself is wrong. Given how much India suffered due to socialism under Indira Gandhi and Nehru, government should have known better.
-- 600 billion rupees is a huge amount that could be better used by government for bettering Indian agriculture. It could improve irrigation, research newer seeds and usher in a second green revolution and permanently change the agonies of farmers.
-- This would weaken the banking system as they will take most of the burden of loan writeoffs. In an international climate of banks in bloodbath, this is the least opportune time for such a plan. Indian banks will suffer and their chance of going big and global will be nipped in bud. No modern nation has grown by screwing its banks and financial system. Banks are the fundamental nucleus of an economy and if u treat it badly, u r in for big trouble.
-- Lastly, by rewarding small farmers this would prolong the agony of Indian agriculture. It is time that Indian agriculture start consolidating and land sizes grow. India uses 600 million people in agriculture and this is a horribly big amount. No sane economist can work out a condition where India would reatain so many agricultural laborers and still become developed. Thre is absolutely no future for so many people. The government's focus should be to move the small farmers away from agriculture by creating more jobs in industry and service sector. Also, India should dramatically increase land productivity and move more lands away from Rice and Wheat and bring in more rewarding crops. That is how rural India can see more money from Indian growth. But, by rewarding the small farmers and prolonging their stay in agriculture the government is horribly skewing India's long term development.

The only way India can revitalize its rural economy is by bringing the long awaited industrial revolution. We have had an agricultural green revolution and a service revolution is already well in its way. But, only industrial revolution can absorb so many uneducated laborers and make India's economic bone. It could wipe out the trade deficit and dramatically reduce unemployment. Thus, the fundamental focus on Indian government should be bring a rapid Industrial revolution at the scale of China's and we need every possible resource to do that. Lots of money, open policies and a strong banking is needed for this revolution. Indian rural people need a chance and deserve a bright future. But, this budget will be a very very big backward step and the Indian media is deluded in praising this step.

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