The Subprime Primer

You hear about it all the time but don’t get what the Subprime Crisis is. Here is the most lucid explanation. 

Caution: A lot of F*** word in last few slides. Just ignore it.

Budget 2008. Farm Loan Waiver: Bihar Misses the Boat.

 It is the second time in last twenty years that Government of India has given one-time waiver for farm loans. Last time it was finance minister Madhu Dandvate in V. P Singh government. This waiver is better news for Banks than for farmers. All the banks must be mighty pleased. There is no doubt that this is a bad policy. It makes those who repaid their loans and those who did not take loans in first place feel like idiots. It creates perverse incentives. If you waive farm loans once in every ten years, I would take it even if I don’t need it. And I won’t repay it even if I can. Worse, bank officials can issue loans in my name; keep the money themselves and benefit from largesse meant for poor farmers. I am not making it up. I have seen this happening in poorly audited cooperative and Land development banks.   

One can go on and on about so much that is wrong with this policy. I am disappointed not because it is a bad policy. I am disappointed about how little Bihar is getting out of this loot. According to Bihar’s agriculture minister, loans worth Rs 800 crore of Bihari farmers would be waived against the total national figure of Rs 60,000 crore. So, Bihar’s share is just 1.33 per cent. The most rural, the most agricultural and the poorest state would get the least from this huge loan waiver scheme

Here is why:

1.      An average Indian farmer borrowed Rs. 2647 from banks last year; an average farmer in Punjab borrowed Rs. 12118 while his Bihari counterpart borrowed only Rs 322. This is the lowest of all states by a huge margin.

2.      We know that averages tell little about the distribution. So, here are some more numbers. Only 1.3 percent of cultivators in Bihar availed institutional credit in 2002-03. The corresponding national figure was 10.1 percent and for Punjab it was 24.2%. Only 1.49% farmers in Bihar have Kisan Credit Cards. Fewer have their crops insured.

3.      Bihar’s credit-deposit ratio is 0.31 against the national average of 0.79. The state accounts for 9% of India’s population and 2.4% of its GDP but its share in total outstanding credit from scheduled commercial banks is 0.9% only. The share in deposits at 2.2% is more in line with the GDP share.

4.      There is one commercial Bank branch for every 30,000 people in Bihar against the national average of 15,000.

All these number point to lower levels of economic activity in Bihar. While that is true, my sense is that even after controlling for the levels of economic activity, Bihar’s financial infrastructure poorer than other states. That itself is a big hurdle to economic growth. Bihar’s farmers and non-farm entrepreneurs have to depend much more on non-institutional lenders. This leads to inefficiency. Non-institutional lenders charger higher interest rates and they do not write-off your loans every ten years.

Budget 2008: The Republic Beats The Union:-).

In post-reforms India, we are all obsessed with GDP growth rates. Sometimes obsessions can lead to delusion. Bihar’s Budget 2008 is an example. In its 2008 economic survey, The Republic of Bihar claims to have grown twice as fast (@16%) as the The Union of India (that is Bharat) in 2006-07. 

The tradition of annual budgets was discontinued in Bihar during the Lalu-Rabri regime (1991 to 2005). The government worked with vote on account. People blamed Lalu of ad hocism. He said it was dynamism: modern economic management is too dynamic to be hinged on annual budgets and five-year plans.

Dynamic or archaic, Nitish Kumar restarted the annual budgets tradition. Last year, his finance minister, Sushil Kumar Modi also started a new tradition when he presented the first ever economic survey of Bihar on the budget eve. A great begining i thought.

This year, the survey has come under severe criticism for its outrageous claim that Bihar’s GSDP grew by 16% in 2007-2008 in spite of a 26% decline in agricultural GDP. Think of it: 90% of Biharis live in villages where agriculture is the key source of livelihood. Agriculture accounts for one-third of Bihar’s GDP and employs more than two-third of its working population. Yet Bihar has grown by 16% in a year when its agricultural output went down by 26%. The claim is so absurd; it does not even merit criticism or a close scrutiny. It is beneath all that. One thing it needs is an errata.

Is finance minister, Modi delusional? I wonder if his analysts misplaced the decimal sign or added an extra zero at some step in data cruncing. He should have rechecked. I am sure he would have done it if there were an error on the negative side.  

The sad part is that this absurd claim takes away all credibility from what otherwise seems to be a fine report. The economic survey is available for fre download here. It is 300 pages (15 megabytes) long, but well written and well presented. The best thing is, you cannot find a better collection of current socio-economic data on Bihar in one place anywhere else. It has a ton of district and state-level data presented in a nice format. I think the government and the NGO that prepared the report deserve credit for bringing out the report.

The problem is that after this manipulation/blunder, the whole report has lost it credibility. I have read the report and I really think there is a wealth of data and information here. This report should motivate interesting new analysis, engender informed discussion and attract people’s attention to important questions. Complete rejection of the report will be really unfortunate.

The state government (and the concerned NGO) should make every effort to avoid this fate. I do not think it will take much. Just a candid acceptance of the error will help to undo most of the damage. There is no shame in it and I don’t think any political capital will be lost either. Another thing, in the current version, many tables and charts do not have sources mentioned against them. The new version should list all (primary and secondary) sources. Verifiability will increase credibility.