India's $15 Billion “Poison Pill”
Poison Pills are mechanisms used in the corporate world to pre-empt certain actions such as hostile takeovers. The Indian government has given a new twist to the concept by making it a part of the national agenda. The Finance Minister, while presenting the budget for 2008-09 proposed a loan waiver of US $15 million (INR 600000 million) apparently to help farmers in distress. This is a classic Poison Pill that no government can afford to implement because of the serious economic implications, and no government can afford to reverse for fear of incurring the wrath of a sizable section of voters in an election year.
The avowed objective of the proposal is to bail out farmers who have lost their crops and are unable to repay their loans. Last year, an estimated 70,000 farmers committed suicide, unable to repay their loans. Though the minister has not revealed as to how this massive write-off would be funded, he has claimed that the move would benefit some 40 million farmers.
To check out the ground reality, we did a survey of 15 villages that are supposed to benefit from the scheme. The sample size was 300 small and marginal farmers. The results are startling to say the least. Of the 300 small farmers, we could not come across a single farmer who would benefit from the scheme. In fact, the loan waiver will not benefit the nearly 110 million small and marginal farmers who have borrowed money from the village lender at interest rates as high as 120%. The beneficiaries would primarily be the relatively large farmers who do not, with some honorable exceptions, deserve the waiver in the first place. We have found that loans taken for agricultural purposes have been used to buy a host of white goods – the latest SUVs, classy mobile phones and DVD Players, among others.
Let us spare a thought for the farmer who has used the loan genuinely for agriculture and has promptly repaid the loan. He gets nothing, nor does the farmer who most desperately needs the help to get from under impossible debt. The government itself is encouraging and probably perpetuating dishonesty. With a precedent having been set, no sensible borrower would want to repay a loan in the hope that one day, the government would write it off.
Political one-upmanship has already started. With elections to several states slated for this year, one of the political parties has declared that it would provide loans to farmers at 4% interest per year – well below the prime lending rate – and as an icing on the cake, no interest would be charged during the first year. How can political formations or governments be so irresponsible?
The solution, as always, is in taking a series of incremental steps that would help farmers in the short as well as the long term. Short term solutions include a simple and viable crop insurance scheme that would take care of the vagaries of the monsoon. Co-operative farming on lines similar to what has been achieved in milk production and distribution can pave the way for modern methods of cultivation, harvesting, and storage to be leveraged. Balancing reservoirs to store excess rain water that would otherwise flow into the sea in a few hours would be a long-term solution. Way back in the 1960s, a federal irrigation minister had suggested the linking of rivers. Everyone laughed at the suggestion. In hindsight, we should probably have listened to the sage advice. Even if rivers cannot be linked, there certainly is a strong case for better utilization of available water. Finally, to repeat what we have been advocating consistently, it is time we harnessed technology to improve agricultural productivity.
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B V Krishnamurthy is the Director and Executive Vice-President of Alliance Business Academy in Bangalore, India, where he is also the ASI Distinguished Professor of Strategy and International Business. An engineer with post-graduate degrees in industrial management, systems engineering and business administration, and a doctoral degree in strategy, he has worked in corporations in Europe and Asia for 23 years (his last stint as CEO of a consortium) before entering academia in 1998. BVK also teaches in business schools in the USA, France, Switzerland, The Netherlands and Russia.
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Dear Mr Krishnamurthy,
I fully agree with you.
On one side, India is looking for loans from outside agencies for the betterment of infrastructural facilities and making sure that the basic necessities are provided to one and all, and on the other side, we have a political gimmick on public display that is intended to ensure power for certain political parties in the coming elections.
Just think of it - what would the external agencies have to say when they see the politicians throwing away money to people about whom they have no idea of the real situation.
As a consultant to various companies, I have myself visited various villages and have seen opportunities by way of which basic facilities can be provided to really needy.
If we have the panchayats and the recently-introduced panchayat audit system coming in, then there has to be some way through which basic data about the residents of the villages can be collected. Also, the kind of crop that is being grown there and the weather conditions of that particular place can be studied (by an independent, non-government agency) so as to suggest better crops and/or better ways of growing crops in that particular area that would also imply that there should be proper government-run storehouses for those areas which would give the farmers an option to sell their produce without going to far-off markets.
In fact, corporates could be encouraged to take up certain areas to develop the local farming, and a periodic report be sent to the Government. There would also be periodic audit for this by an independent agency. The result would be that there would be a better flow of information as to who are the really needy and what all do they need.
For example, if a particular farmer is planning to buy a tractor, this corporate could arrange for the necessary paperwork for the purchase and send the same to the government for approval. Once approved, this corporate shall negotiate with the banks for financing the purchase on behalf of the farmer and once financed, will make sure that the payments are regular. Additionally, this farmer would not be eligible for another tractor loan for some time, unless he is able to prove the need for it.
What do these corporates get in return? They buy the produce from the farmer and sell it to the government or if they feel like, they process it for themselves. The government may set up a price at which they would buy the produce from the corporate and the amount therefrom that the corporate would get, so that the farmer gets his due share. If the farmer wishes to sell it directly to the government, he may do so. However, the price that he gets from the Government would be equal to the price that he would get from selling the produce to the corporate, thereby securing the interest of all the parties.
This could also be promoted by way of transferring the sale amount in the respective bank accounts. The payments would be prompt and accurate. Also, the instalments of that particular tractor would be deducted from this payment itself and transferred to the financing bank. This would ensure the elimination of the middlemen in the purchase of produce as well as in the financing of the tractor. Everything would be on paper, thereby ensuring cheaper processing and elimination of unaccounted money. The government would have complete details of what everybody in that particular area have and/or want.
The corporates could also promote rural insurance, thereby getting paid commission in the process. The banking/bancassurance would reach the interiors and so would the development process for that particular area. Cheaper communication systems can be set up so as to enable the local community connect to the outside world and the education is brought in to that particular area.
Since these corporates would be in touch with the ground realities, they would be better equipped for carrying out all these tasks.
The corporates could also manage toll booths for that particular area on BOOT basis, thereby helping in improving the roads, etc. Also, these corporates could set up things like solar energy generators for the villages or the biogas/thermal power/wind power/water turbines (renewable energy resources) etc., thereby taking care of the electricity requirements for those areas. Of course, these corporates would be allowed tax concessions as they are helping to build the infrastructure.
The government could also set up ombudsman office to look into the grievances of farmers, etc. to ensure that they are not taken for a ride by the corporates.
All this is intended to give the Government a better idea of who exactly really needs what, and would avoid the loans being given to people who do not deserve those loans. Also, the work of the Government would be limited to governing, and not into losing money by lending and then waiving loans.
This is just a rough idea and needs to be developed fully. Maybe it is already being implemented, but at least it is not visible to the common man.
Things do not happen overnight. Also, there would be resistance from the local middlemen. But that is where the government should concentrate - providing security to the corporates and dealing with the local middlemen.
I think a small step in this direction would be a big leap for the country. At least towards self-reliance, I'd say.
- Posted by Vishal
April 29, 2008 7:32 AM