In one of the first acts of his Government, almost replicating Congress-style populism, the UP Chief Minister, Yogi Adityanath, has announced a loan-waiver up to Rs 1 lakh for about 85 lakh small and marginal farmers in UP, covering more than 90 per cent of the state’s farming community. This will cost the exchequer a whopping Rs 36,729 crore, fairly close to the Rs 52,000-crore farm loanwaiver scheme announced by the Congress-led UPA government’s Finance Minister, P. Chidambaram in the 2008 budget, ahead of the 2009 general elections that returned the UPA to power. The UP government will have to finance this concession through market loans, putting at risk its fiscal deficit limit of 3 per cent of GDP set by the FRBM Act, which it has already breached. Of course, Adityanath was only fulfilling the BJP’s election promise, and he cannot perhaps be faulted on this count. But both the election promise and the loan-waiver raise several disturbing questions, and the nation needs to reflect.

Whether the scheme will minimise the woes of the farmers is an altogether different matter, given the pathetic record of the state in the matter of delivery. Despite the energy that the new CM seems to have infused into UP’s decrepit administrative apparatus, he has to deal with the same dysfunctional bureaucracy. It would be foolhardy to expect that the delivery system will be transformed overnight into an efficient mechanism.

Governance entails efficient and effective delivery, based on careful planning and monitoring. Most government schemes suffer universally from wastage and leakage, financial misappropriations, and institutionalisation of corruption, which together render the outcome of such schemes poor and sub-optimal. The 2008 UPA loan-waiver scheme was audited by the CAG, whose report revealed serious lapses and deficiencies in delivery. Out of 3.73 crore farmers who were given debt relief, CAG had test-checked some 90,000 cases, and more than 20,000 (22 per cent of checked cases) revealed serious shortcomings. Thousands of ineligible farmers received benefits of the waiver, while deserving farmers were excluded. The benefits were irregularly extended to microfinance institutions and banks in violation of guidelines. Tampering with records was widespread. In fact, the BJP had then demanded a CBI inquiry, terming the fiddle as “a big fraud committed on the nation” involving a “huge scam of Rs 10000 crore.” The outcome is unlikely to be different this time.

Further, NSSO data reveals that less than half of the small and marginal farmers in UP are actually indebted to banks. The majority of farmers are indebted to informal or noninstitutional sources like moneylenders, traders, or affluent farmers. They will not receive any benefits under the scheme. The smaller the landholding of a farmer, it becomes less likely for him to get a bank loan. Among farmers with less than one acre of land, just 28 per cent have outstanding bank loans; the remaining 72 per cent owe money to non-formal creditors, mainly moneylenders. Thus the intended relief to small and marginal farmers remains in doubt.

As regards the economic fallout of the waiver, one must remember that UP’s debt burden is next only to West Bengal and Punjab, with its outstanding liability amounting to over 32 per cent of its GSDP in 2014-15, in which year alone it had raised Rs 35520 crore, compared to Rs 14900 crore in the previous year. As a result, the fiscal deficit had exceeded the FRBM limit by 0.33 per cent, and interest payment amounted to Rs 18865 crore, or 11 per cent of revenue expenditure. With this additional Rs 36000 to be raised in 2017-18, its debt burden and interest liability will increase alarmingly. Servicing this debt will squeeze the availability of funds, with most of the borrowed funds going towards repayment of the existing loans, and very little accruing to the state for use in development. The impact on development of the impoverished state would be disastrous.

This is not to argue that distressed farmers should not be provided relief when they need it the most, but the mode of providing such succour needs to be carefully thought through. It distorts the loan discipline and encourages wilful default, as the RBI Governor has already pointed out. It promotes a culture of irresponsibility. The banking system, already reeling under unmanageable NPAs, is also affected while the wilful defaulters stand to benefit. There are many other ways of providing assistance to affected farmers.

Further, this may signal the beginning of a far more serious contagion which is likely to spread like cancer in our bodypolitic. As Ashok Gulati and Siraj Hussain had pointed out, the Congress manifesto in Punjab had promised a similar step. Madras High Court has suggested farm loan-waivers to the Tamil Nadu government. Maharashtra, Karnataka and Kerala, which are suffering from drought, might also take a similar step. With state elections due in several states before the 2019 Lok Sabha elections ~ in Gujarat, Himachal Pradesh, Rajasthan, Madhya Pradesh, Karnataka, Chhattisgarh and four north-eastern states ~ it could only be a matter of time before such waivers become an all-India norm, to be financed through state budgets, distorting even a semblance of fiscal discipline. FRBMs, which had rescued the states from the brink of a disastrous debt trap, might as well be scrapped.

Bad economics is not good politics. Political parties promise freebies ~ colour TV sets, laptops, mixer-grinders, free electricity, water or loan-waivers in their election manifestos. The problem is embedded in this spurious “benevolence”. Parties dole out national resources under the garb of democracy.

In the case of S Subramaniam Balaji vs. Government of Tamil Nadu (2013), the Supreme Court had observed, that “the reality cannot be ruled out that distribution of freebies of any kind undoubtedly influences all people. It shakes the root of free and fair elections to a large degree.” However, since distribution of freebies or other promises made in an election manifesto cannot be construed as a ‘corrupt practice’ under Section 123 of the Representation of the People Act, 1951, the Supreme Court directed the Election Commission to frame appropriate guidelines.

Political parties reacted to this judgment, saying it hurt their common interest by limiting their authority to dole out national resources for petty electoral gains. Article 324 of the Constitution gives the Election Commission unfettered powers to superintend, direct and control the election process. This implies monitoring activities of political parties including promises made in their manifestos for conducting free and fair elections. In accord with the Supreme Court directive, the EC introduced its Model Code of Conduct ~ “The Election Manifesto shall not contain any promises that go against the ideals and principles enshrined in the Constitution. There can be no bar on the state adopting welfare measures. But, political parties must refrain from making promises that undermine the purity of the election process or aim to exert undue influence on the voters. There must be transparency with respect to the promises and how the parties aim to implement their promises. The promises must also be credible. Wherever freebies are offered, parties must broadly state how they plan to gather the funds and finances to fulfil such promises.”The wording of the guidelines thus leaves the field wide open for parties to make any promises, including freebies to voters, which goes against the spirit of the Supreme Court ruling. Apparently the Commission had succumbed to the pressure of political parties, forgetting that in a mature democracy, a party owes good and corruption-free governance and nothing else to the electorate. It also undermines the fact that loan-waivers or subsidised power are at best temporary measures. They do not address the larger problem of scarcity, input costs, and capacity. The Election Commission ought to crack down on freebies.

The writer is a commentator, views expressed are his own.