Farmers can get equipment loans, debt relief
Recently, the State Bank of India announced that it was halting loans to farmers for farm equipment such as tractors and combines. Now, Arun Kumar of the Hindustan Times reports1:
Stung by protests from farmers, politicians and even a section of its own employees, State Bank of India on Wednesday hurriedly withdrew its controversial decision to suspend financing of farm equipment, primarily tractor loans.
“We regret that our circular dated May 16, 2008, concerning tractor loans has been misunderstood and has given rise to concern. The circular is withdrawn with immediate effect,” SBI Chairman OP Bhatt said in a statement.
What misunderstanding was there? According to Anup Banerjee, an official from the SBI, the halt was intended not for small farmers but for large-scale farmers with huge loans who have fallen behind in payments.
Another angle to this situation is the impact of the farmer debt relief plan being pushed by the government. According to Moneycontrol India2, the guidelines for the Farmer Debt Waiver Scheme have been passed and will allocate Rs 71,680 crore ($16.8 billion at current exchange rates) to loan forgiveness. Small farmers are expecting to get 100% forgiveness, whereas large farmers (those with more than Rs 50,000 borrowed) will have up to 25% forgiven.
This loan forgiveness program may be at least partly responsible for SBI’s problems to begin with, though. In The Hindu, C. R. L. Narasimhan comments3 on the harm SBI’s backstepping has done to their image as an independent bank. But also, he notes that:
Already there are indications that even farmers who would have repaid their loans are holding back hoping to get a waiver.
This reminds me somewhat of the subprime mortgage crisis in the USA. Even people who could pay their mortgage have chosen to walk away, hoping for some kind of government bailout. What portion of SBI’s 17.8% default rate on farm equipment is due to this sort of behavior is an open question.
1 Kumar, Arun. SBI backtracks on farm gear loans. Hindustan Times. May 21, 2008.
2 Cabinet okays Farmer Debt Waiver Scheme guidelines. Moneycontrol India. May 24, 2008.
3 Narasimhan, C. R. L. Tales behind SBI’s withdrawn circular. The Hindu. May 26, 2008.
More on Black Friday
From an editorial today in The News1:
The KSE crash is of course only a reflection of the overall situation of the economy and, dare one say, the polity. The grim reality is that Pakistan finds itself in the grip of both economic and political turmoil. The two are indeed closely tied together. The economic crisis – high inflation along with a mounting budget and trade deficit along with declining investment, a weakening currency and capital flight – is contributing to political uncertainty, with expectations that it may be used against the government with the grim inflation figures and lowered debt rating offered up as evidence of the inability of government to deliver. At the same time, in the immediate future, there can be little hope of the political stability that would be needed to boost investor confidence and create an environment conducive to economic growth. The vicious cycle seems unbreakable for the present. The mood at the stock market has indeed remained downbeat for weeks. This is unlikely to change soon given the turbulence in the political atmosphere, and a long, rocky road towards recovery from both political and economic crisis still lies ahead.
1 “Black Friday”. The News. May 25, 2008.
No commentsRelief for the poor
Business Recorder reports1:
Punjab Finance, Planning and Development Minister Tanvir Ashraf Kaira has said poor, salaried class and farmers will get relief in the coming budget for the fiscal year 2008-09, saying, “Our main focus would be to give target subsidy to the poor in the budget.”
The relief would come primarily in the form of price controls. Abid Hasan, a former operations adviser for the World Bank, agrees with the goal, if not the means, in his take on the situation published in The News today2. His plan revolves around the introduction of a “poverty reduction surcharge” (his fancy name for “tax”) on what he considers superfluous luxuries like cars, cell phones, stock trading, and high utility bills.
Actually, at first I was encouraged because he takes the view that government subsidies and price controls have contributed to Pakistan’s economic woes. He argues, for instance, that by letting farmers sell at market prices, smuggling and black market loss would be reduced and farmers would have the resources to increase food production for next year. However, look at what Hasan proposes when it comes to cars:
More generally, tax policy should be used to switch consumption patterns appropriate to the country’s poverty status. As an example, in Pakistan for every one car sold, four motorbikes and four cycles are sold. The ratio for India is six motorbikes and 10 cycles, and in Vietnam it is 25 motorbikes and 10 cycles, for every one car sold. These two countries are almost the same or higher per capita income, and similar poverty profile, as Pakistan. And yet their population uses, relatively, more motorbikes and bicycles. Progressive tax policy – for example, zero rating bicycles, motor bikes and public transportation and high taxes on cars – and correct pricing of fuel would encourage this “pro-poor” switch.
He offers no justification for the implication that India and Vietnam have a healthier ratio of cars to motorbikes and bicycles. Why not tax cars so much that the ratio falls to 1:100? How is the proper ratio determined? Why isn’t it good that more Pakistanis can afford cars? Without the hard numbers, it’s hard to even say that Pakistanis can afford more cars, since it could just as easily be that fewer Pakistanis can afford motorbikes and bicycles, or that bicycles and motorbikes aren’t as useful to Pakistanis.
In the end, I’m just annoyed that Hasan takes the time to rail against socialist economic policies like price controls only to suggest that we solve the problem by introducing new socialist economic policies like high taxes on certain items to get various ratios into what the government determines is most healthy.
1 Budget will be poor-friendly: minister. Business Recorder. May 24, 2008.
2 Hasan, Abid. Spend on the poor to save Pakistan. The News. May 24, 2008.
Karachi stock market reflects political, economic uncertainty
The Karachi stock market closed down over 4.5% on Friday in the largest single-day loss of 2008. According to Dawn1, investors had expected a drop after the State Bank of Pakistan raised the discount rate to 12% from 10.5% on Thursday in a bid to curtail inflation. However, the size of the drop suggests that the rate increase was a pretext for exiting the market as Pakistan faces tough political and economic challenges. Since mid-April, the Karachi stock market has lost about 20% of its value. Inflation has increased dramatically, the government budget deficit has reached record heights, and foreign exchange rates have fallen.
1 Hussain, Dilawar. Billions wiped off on KSE’s ‘black Friday’. Dawn. May 24, 2008. No comments
Pakistan’s credit rating cut
In the past few days, both Moody’s and Standard and Poor’s have cut the credit rating for Pakistan’s government bonds. This is primarily a result of two factors: political instability and a growing trade deficit. The new ratings will have a detrimental effect on foreign investment in Pakistan as investors lose confidence.
(May 22, 2008). Moody’s downgrades Pakistan ratings. Business Recorder.
(May 16, 2008). S&P cuts Pakistan rating on economy, politics. The News.
No comments