Do Farm Loan Waivers and Bank Bailouts Make for Sound Economic and Fiscal Policies?

Farm Loan Waivers, Bank Bailouts, and Moral Hazards

Farm Loan Waivers are the Flavor of the Season as Indian States take turns indulging in a game of who waives the maximum loans taken by the farmers.

Indeed, with elections approaching, a form of Competitive Populism has begun wherein each political party is trying to outdo the others in waiving off farm loans.

On the other end of the spectrum are the Bank Bailouts which have been a feature since the time of the 2008 Global Economic Crisis.

The bank bailouts are usually justified on the grounds that if they are not bailed out, there would be systemic risks to the entire financial system.

Thus, we have a situation where bailouts and waivers have become the norm rather than the exception.

Poor Farmers, Rich Investors, and the Perils of Bailing Out Both

Indeed, while boom and bust are cyclical aspects of free market capitalism, it also needs to be examined whether periodically bailing out poor farmers and rich investors is worth the price.

The terms poor farmers and rich investors have been deliberately used as whenever critics raise objections to farm loan waivers, then they are countered with the argument that if Big Banks and Rich Investors can be bailed out, why not Poor Farmers whose livelihoods are at stake and more so, when they are committing suicide purportedly due to indebtedness.

On the other hand, there are studies showing that indebtedness is not the reason for farmer suicides and the problem is to do with structural issues as far as Indian Agricultural Sector is concerned.

The point to be noted here is that whatever be the reason for justifying farm loan waivers and bank bailouts, there must be a well thought out strategy to tackle the recurring problem of indebtedness whether it is banks of farmers.

In other words, there must be ways and means to check the levels of debt from time to time as well as system of Checks and Balances that prevents the problem from spiraling out of control.

Effective Regulation, Political Interference, and Longer Term Economic Health

This calls for a robust regulator such as the RBI or the Reserve Bank of India keeping watch on the entire financial system so that the excesses of Free Market Capitalism can be curbed.

Having said that, one must also examine the role played by the Politicians in causing and then attempting to solve the problem.

Indeed, more often than not, it is the politicians who Promise the Moon for their voters and constituencies and then encourage them to take on debts without any checks or constraints.

In other words, they build up the booms and then when the inevitable bust happens, then they get into further populism by waiving off their loans.

This creates structural imbalances as far as the Economy is concerned and hence, there are many experts who are now openly calling for as little interference as possible from the politicians.

Indeed, the resignation of Urjit Patel, the former RBI governor is a classic example of how regulators have been undermined by the ruling dispensation of the day. Without adequate regulation, the economy would be in doldrums and hence, maybe it is time for a debate on how much politicians can interfere with the economic aspects.

Debt is Endemic to Capitalism, but, It Must be within Tolerable Limits

Debt is a feature of any economy and hence, one must also not say that there must not be any debt. However, the point to note is that there must be responsible lending and borrowing if not only the former since human nature is such that when given a choice between pleasure and pain, one automatically chooses the former.

Therefore, instead of expecting responsible borrowing which is the case with a few, it is better to institutionalize responsible lending which benefits the many.

This is where mature financial systems come into play since all the Cogs in the Machine in such economies are geared towards a systemic and structural wellness.

Of course, this is bit idealistic and Utopian and there are very few economies in the world that can be classified as such.

On the other hand, such systems are possible at least to some extent as is the case with some Scandinavian countries and to a lesser extent, Australia as well. Therefore, the central challenge of our times is to design such systems that can then actualize Responsible Capitalism.

Fiscally Responsible Policies

Further, if loan waivers and bank bailouts become permanent features of the economies, there is the risk of such economies being fiscally irresponsible.

After much effort, the Indian polity now has the FRBM (Fiscally Responsible Budgetary Mechanism) and which regulates the Fiscal Management and Imposes Sound Budgetary Control. Instead of undermining this mechanism, there must be efforts to institutionalize Fiscal Rectitude that would provide the much needed stability to the system.

Moreover, markets are very unforgiving whenever countries stray away from fiscal balance and this is more the reason for all stakeholders to work together.

Alas, this is not happening at the moment and hence, one must worry about the longer term prospects of the Indian Economy.

More so since it is election season and hence, there might be temptations to loosen the purse strings.

Lastly, like any individual who sleeps well at night when he or she manages his or her money well, Governments too can rest easy and relax if they follow sound fiscal and monetary policies.

To conclude, while we are not against bailouts and waivers, all that we ask for is fiscal responsibility and economic soundness of policies.