Thursday, January 11, 2007

Topic for the day - Take 3

Good going on he fisrt two topics. So here comes the third. I have tried to put in an general issue with a little economic touch.

"Farm loans at lower interst rate - An economic burden caused by populist politics"

This can have a wide variety of views and approaches. So wud like to see people coming in full flow and pouncing on this. Some research on the net is allowed so that you can add more value.

Also wanted to touch 'Economics' and may be put out some helpful ideas from my side on it. My comments may not come till Monday since my home Internet is out for a few days.

So start shooting.

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Anonymous Anonymous said...

I m just making points here. May not be correct gramatically
How often do we hear of Farmers committing suicide which is mainly due to high debt or failure of crop or uncertain weather.
Bank tempting farmer with interest rates and out of ignorance the person puts to risk all jewellery and house etc
Soln: a)Educate them upon
1. their needs and way to clear off loan on 1 good season rather than investing that money on land again. This increases his credit worthiness
2. His cultivation tactics, like his land cud b used for multiple crops
3. on having a farm pond, to encounter uncertain weather and growing fish is another source of income
b) Just like we have education cess, we can have agriculture cess within the tax plan which will go exclusively to the farmers.
c) Banks sud clearly make the farmers understand the policies behind their loans and sud have certain flexible policies depending upon the weather. (like, rigidity can be removed in case of a drought)


1:37 AM, January 12, 2007  
Anonymous Anonymous said...

Farm loans at lower interest rates can be viewed as a different instrument from different parties. Proponents of free-trade would term it as a part of "Farm Subsidies" lavished out by the Developed Nations to their farmers, which in turn distorts the overall agriculture market of the world. While the protectionist lobby would view this instrument as a measure to protect the poor farmers from the prospects of crop-failure, increasing their risk-taking capability and ultimately encouraging entrepreneurship.

1) In United States, 10% of the farmers (rich ones) corner 70% of the subsidies. That is the case which happens everywhere where affirmative action is involved, including India.
2) This approach of lowering the cost of farm-loans distorts the overall crop production pattern. For e.g. If Cotton farmers are given low cost loans to grow cotton in an already competitive and low-priced market, It will further drive down market price of cotton ultimately hurting the farmers in the long run. The better option would have been to educate farmers about the world market (e.g. ITC's e-choupal initiative), give them access to markets without middlemen, and teach them how to diversify their crops rather than their conventional crops.
3)Governments should take their responsibility and rather than artificially distorting market, they should promote free-trade policies which will promote economic growth, drive down costs of commodities and foster competition helping the overall economy.
4) As a counterpoint, it can be said that sometimes these measures might be necessary, such as in case of farmers of vidarbha in maharashtra, where 3 farmers are doing suicide everyday. But again, emphasis should be more on making farmers self-reliant and competitive rather than making them puppets living on government subsidies.

2:25 AM, January 12, 2007  
Anonymous Anonymous said...

Another point could be allowing more agencies to get involved in Rural markets, by removing Regulatory frameworks. Microfinance is one tried and tested method, but is not very helpful in case of unpredictable agricultural cycles, as is the case in India. In India, a large part of Banks funds is appropriated by the Government itself, which results in high cost of loans. Rather than doing the whole good work itself, which it rarely does, the government should revise the SLR ratios downwards for the loans that are invested in agriculture, which will help banks in giving loans to the farmers at a lower cost.

2:37 AM, January 12, 2007  
Blogger Gyan-ee said...

Excellent points though I may not agree with some.

Points like credit worthiness, farmer cess (though this I feel has to go to cover the lower interest rate:)), distortion of market, govt taking help of other agencies, counter-effect on prices are very good, though as i said i may not agree with some of them.

Himanshu, I specially like the direction and consistency in your arguments. Consolidate well and you would take the trophy. It would be a hard job since I personally do not agree with your points.

Note that you will get points on many things that the panel may not agree :) And thats the fun :)

6:16 AM, January 12, 2007  
Anonymous Anonymous said...

Would not start but chip in between with these points..
(1)Regarding himanshu's point that sometimes as in d case of vidarbha,tese measures r necessary,i wud say that d intent shud b 2 avoid these situations as far as possible..appropriate measures shud b in place so that d situation does not gets as out of hand as this one.
(2)Shelling out loans at a lower rate of interest wud do more harm than good..agreed that d farmer will have 2 pay a lower amount as interst,butthen in an attempt 2 expand his operations he might end up taking loan 4 a greater amount ..thereby increasing d burden of principal amount he has 2 pay..
(3)The onus is on d govt. 2 educate d farmers 2 keep their options wide as 2 b ina position 2 cover up d loss they might suffer in one area by virtue of d income earned through other..
(4)Y create an unnecessary burden on d economy by offering loans at low interest rates,when its very much possible 2 avoid d situation with some homework in this direction.


7:32 AM, January 12, 2007  
Blogger Gyan-ee said...


Good points. Specially a fresh point on famer taking more loans if given a lower rate. Though i am not sure if you are correct statistically, it is a good direction of thinking.

Avoid the last point, since it is a very general statement with no content :)

Complete analysis in a while

4:44 AM, January 15, 2007  
Anonymous Anonymous said...

START: - Friends let's try to identify the various Stake-holders, their objectives and the impact of subsidies on them.

1) Government - Economic upliftment of farmers, Higher revenues, A lasting solution to failed agricultural o/p, Economic growth in the long run, No undue pressure from the Social bodies n NGOs.

2) Farmers - Sustainable monetary benifits and hence security. Consistent returns on their investments.

3) Social Bodies / NGOs - Well being of the affected party in the short term and the long term. To cash in on opportunities to create a hue n cry and glorify themselves.

Government -

Now, having Subsidies, would not only distort prices, but also make the farmers dependent, besides being a burden on revenues. Also, it's not a lasting solution.

Perhapes the government can think of investing in "improvising ways to minimise the impact of erratic rainfall". this may be in the form of better agricultural methodologies and practises. This will not only empower the farmers, but also keep the social bodies "happy".

Farmers - Subsidies may help them in the short term, but won't take them a long way, as the falling prices spiral will catch up with them. Perhapes educating them about Free Market dynamics, appropriate crop selection based on demand-supply and prices, wud take them farther. Besides pruning out the middlemen as in case of e-chaupals would definitely be a big boost.

Social bodies - They won't have much to do, if the whole issue is understood and dealt with appropriately by the governement and the concerned farmers.

General comments -

In cases where it is absolutely impossible to do away with subsidies, and improvisation would take time to be effective. Have a plan in place to phase out the subsidy in parts and at the same time initiate the other improvements discussed above.


5:19 AM, January 15, 2007  
Anonymous Anonymous said...

START: Irrespective of what are the reasons behind the low interest rates, these incentives can be beneficial. Think of the farmers in Vidharbha commiting suicide for lack of proper cotton prices, lower interest rates will make it possible for them to repay & make a profit on their investment.

More points:
1) As can been seen in the case of Grameen bank, the main problem for farmers is small credit, that can free them from the shackles of zamindars & local lenders.

2)India needs to progress from the grass roots level. A farmer in a remote village cannot see the progress in IT & retail. What he wants is a good produce, some insurance, & a good price for his crop.

Unless the farmers & rural people , who make up 1/2 of India's population, rise above their current living standards, we cannot call our nation developing in the true sense.

3)Vote bank may be a motive behind this move, but we can make it a productive process by introducing accountability at every level.An accurate account of the amount invested for loan waivers, low interest rates, & the corresponding improvement/deprovement studies for the farmers in those areas can be conducted.

4)As citizens, we can demand tweaking & improvement of these moves, so that they achieve success, rather than just remain vote drawing hollow promises.

5)It is a right thought that it is the tax payers money going into a political move, but unless we help our rural compatriots, India shining shall remain the elusive aim ever.

P.S. The following point is a slight deviation from the original topic.Would it be wise to mention it?

6)In addition to low interest rates, a measure in tandem that could improve a farmer's credit, would be letting the price of a crop be decided by market forces rather than set by the government. Pegging of prices at artificial lows or highs causes a lot of losses both ways.etc.

Awaiting your comments.

5:41 AM, January 15, 2007  
Blogger Gyan-ee said...

Good start Rosogolla. Your try at giving it a structure is commendable. Cud have been a little more articulate, but thats fine.

Your absolute disliking for the NGOs makes me smile.

Rest of the comment in the complete analysis to follow

5:45 AM, January 15, 2007  
Blogger Gyan-ee said...


Very basic common sense arguments from you. I am impressed and the same time disappointed that these points did not come from anybody else.

You take the crown. And you have reinforced the funda "Think simple and clear and for God's sake 'THINK'"

6:21 AM, January 15, 2007  
Blogger Gyan-ee said...

I am deeply disappointed. I am sure that the group made very good points but did not take your arguments ‘forward’. Rise above the shallow waters and swim deeper. You are competing for the top B-Schools and you are the cream of the country.

I want to believe that it was the weekend lethargy since Aparna came fresh on Monday evening and made some straight forward simple arguments to clinch the crown. Her slogging in the last overs has saved the group some embarrassment. Go through the analysis at the end. Though there were some economic fundas that wud add to your knowledge base, most of the ideas would come just from Thinking.

Consolidation (There was lot to do in commenting). Unusually, My start/points have been intertwined

1. Famer Suicide and a need to avoid such situation by active intervention
2. Active participation of the Government in partnership with organization to educate farmers better
3. Farmer cess like education cess to support famer subsidies and lower interest loans
4. It can encourage ‘entrepreneurship’ among farmers
--- Good point

5. Rather than trying to do the whole good work itself the Government should engage the help of other organizations
6. The farmer may engross himself in more debt and hence the whole idea could have an adverse effect
--- Good perspective

7. The scheme may create a burden on the economy
8. Government should think of improvising ways to minimise the impact of erratic rainfall
--– very good point. But should have concluded with a better solution. May I suggest farm insurance for instance

9. Have a plan to phase out the subsidies over a period of time
--- Good point. But subsidies are not what we were talking about :)

10. Government should try and prune the middlemen
---– Guys, middlemen also are effective market forces and most of the time a necessity. Don’t demonize them. There are middlemen everywhere – real estate, job market and even in flesh business. Their duty is to make the customer meet the producer and they get paid for it. Some do get benefited more, but don’t hang them for it. Btw, e-choupal is a kind of middleman.

11. Access to good credit is important for farmers to free them from the shackles of zamindars & local lenders. Lower interest rates will make it possible for them to repay & make a profit on their investment
---– Why couldn't anybody else think of this. Should such an obvious point win a trophy?

12. India needs progress at grass root levels. Unless the farmers & rural people , who make up 1/2 of India's population, rise above their current living standards, we cannot call our nation developing in the true sense
---– Can I see Aparna sweeping the GD with some basic common sense arguments here. Kudos Aparna.
----- Re-phrase the point thus and this cud have been a wonderful START. "Prosperity of a nation does not just happen by wealth generation, but also by an equitable wealth distribution. Farm loans at a lower rate is one attempt at uplifting the sector on which more than 70% of the nation is directly dependant and from where more than 50% of the nation's GDP comes from. The important thing is 'Is it effective', and is so 'Is it effective by itself' and 'If it is effective, how to implement it better'"

13. Vote bank may be a motive behind this move, but we can make it a productive process by introducing accountability
---– ‘Accountability’, A brownie point for that

14. It is a right thought that it is the tax payers money going into a political move, but unless we help our rural compatriots, India shining shall remain the elusive aim ever.

15. In addition to low interest rates, a measure in tandem that could improve a farmer's credit, would be letting the price of a crop be decided by market forces rather than set by the government. Pegging of prices at artificial lows or highs causes a lot of losses both ways.etc – The crown goes to the lady.

Parting shots and some economic fundaes (Oh so many of them !!)
1. Please understand the subtle difference between the subsidy and low interest loan. From an economic perspective, subsidy is a clear-cut Government “expense” to support farmers while a low-interest loan is a Government “investment” for the upliftment of the farmers. In a loan, there is a collateral (land, future crop etc) and the farmer has taken it specifically to invest in something (land or crop) and thus expects a return out of the investment which he shall use to repay the debt.
--- Simple economic funda - Investments are better than expenses

2. Giving low interest loans is akin to tax-free regime for software companies and SEZs. It is a deliberate market anomaly brought in not as an SOS but as an encouragement for development. Don’t treat the farmers as taking away Government money. Remember, many other industries are not happy with Government giving tax free regimes to software companies, but thats the way it is.

3. Remember, interest on house loans are also lower than industrial loans. Because of the collateral and the encouragement of the Government. It may have distorted the real estate market a little bit with inflation, but that is an ‘understood’ side-effect and is not so bad.

4. Farm loans are not sympathy instruments. They are instruments of encouragement to the agriculture sector. Support to Vidharba farmers (remember there is a drought situation there) is akin to flood/tsunami relief. Low-interest loans cannot solve that. ‘Loan waivers’ may. And there is a difference between low-interest loans and loan waivers.

5. There has been lot of points on educating the farmers. Very elitist thinking. Please understand that the farmer knows about the issues with crops better than the Government or the NGOs. They just may not be in a position to resolve those issues. So it is fine that the point is made once, but not fine being repeated because that means that the group is not thinking further. Remember, the Britishers wanted to teach Indians ‘democracy’ once upon a time :)

6. Burden on the economy argument – it is an investment by the Government like that on defense, roads, industry tax waivers etc. It is the duty of the Government to take that burden.

7. The very reason 'tax' exists is for better distribution of wealth. And what better than for it to go to improve the bread-earners who are to be uplifted. There is nothing else that the Govt is doing for them anyway unlike its support for so many industries.

8. Statistically, rural loans have lesser bad debts as compared to urban ones.

I am sure I have missed on some points that I could have added and I have also taken a very strong pro stand. I would not have taken such a strong pro-stand if the group had been a little more pro :)

Understand that you can take the best value out of my guidance if you can cover all the points and make me work hard to give additional points. So it is in your hands how much you take out of me.
In the end, do not get disappointed with the extra bitter critique. It was intended to shake up your dust. Let us see people fighting back with some good points for the next topics. Can I already hear a ‘Har har mahadev’ battlecry ?? :)

6:53 AM, January 15, 2007  
Anonymous Anonymous said...

Thanks for elucidating the diff between subsidies and low interest loans, Gyanee ji....:)...

Reading further down.....


5:08 AM, January 16, 2007  
Anonymous Anonymous said...

Awsome points....Tax as an instrument of wealth distribution, and the comparison with the Tax holidays on SEZs....


5:14 AM, January 16, 2007  
Blogger Gyan-ee said...

Thanks Rosogulla

5:28 AM, January 16, 2007  

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