Grand Trunk Road

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 The circular is withdrawn with immediate effect,” SBI Chairman OP Bhatt said in a statement.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³ Narasimhan, C. R. L. Tales behind SBI’s withdrawn circular.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.

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.

For the past few months, food prices around the world have risen dramatically and many are angry and fearful. This article in Pakistan’s “The Post” newspaper suggests that, for Pakistan at least, the government is to blame. Author Jawaid Imam argues that flour is being smuggled to Afghanistan where it can be sold for a higher price and that domestically the flour suppliers are selling flour privately rather than supplying the Utility Stores, where the poor can buy government-subsidized food. The government is turning a blind eye to these activities.

As Imam notes, farmers in countries like the USA, Brazil, and Argentina are profiting from the rising prices. He does not consider the plight of Pakistani farmers — when food prices are low, they must compete with foreign imports; when food prices are high, they are banned from exporting and profiting.

For me, the food crisis has made it clear that food security should be one of the top concerns of any nation. Hopefully when this crisis is over, Pakistan will take meaningful steps to help domestic farmers.

Article: Food crisis and Pakistan
Author: Jawaid Imam
Publication: The Post

This editorial takes a pessimistic view of the consequences of the PML-N’s withdrawal from the ruling coalition. It cites the difficulty of restoring the pre-emergency judiciary since that will lead to possible destabilising confrontations with the President, the Army and the current judiciary. Any constitutional amendment attempting to solve the crisis will need a 2/3 majority to be pushed through. In the meantime, the looming financial and economic crisis is further threatening stability. The article touches on a proposal by Lahore economists to alleviate the food crisis by issuing food stamps to needy citizens.

Article: Problems that lie ahead
Author: The Daily Times Editorial Board
Publication: The Daily Times