Modi must say no to Naidu’s demand for Rs 54,000-cr super-freebie

You have become Prime Minister by promising strong, decisive governance. To prove you are serious, you must veto the demand of your ally, Seemandhra chief minister Chandrababu Naidu, for Rs 54,000 crore to fulfil his crazy election promises.

Your election campaign promised a dynamic economy enabling people to prosper on their own, not depend on government doles. That distinguished you from the Congress approach of promising subsidies and sops to every vote bank.

However, Naidu in Seemandhra outdid the Congress by promising the biggest freebies in the history of state elections. He pledged to write off bank loans to farmers and women’s self-help groups. He estimates this will cost Rs 54,000 crore.

To put this colossal sum in perspective, recall two earlier loan waivers given by New Delhi to farmers nationwide. The first, in 1990, cost Rs 10,000 crore. The second, in 2008, cost Rs 60,000 crore. But now Naidu wants Rs 54,000 crore for Seemandhra alone, a state with barely 5% of India’s population.

Even allowing for inflation since earlier write-offs, the demand is outrageous. Naidu is examining different ways to get the cash.

One is a special package of Rs 54,000 crore from New Delhi. The second is permission to raise Rs 54,000 in bonds, violating all RBI limits on state loans.

Mr Modi, your correct response to Naidu would be a choice Gujarati curse. That may be too impolite, given that you two are allies. But please be utterly blunt in telling Naidu that, unlike the preceding UPA government, you will never submit to blackmail by regional allies. You need to prove that you are no Manmohan Singh. If Naidu promised much more than he can deliver, let him stew in his own juice.

Don’t let him subvert your own approach of providing opportunities, not freebies. Politicians always claim that freebies are essential to help those in distress. But that is best done by cash transfers to the needy, not by blanket write-offs that benefit hordes of undeserving people, and wreck repayment discipline. Without repayment discipline, rural India cannot have a healthy financial system, though it desperately needs one. Naidu’s approach is rank bad governance, the opposite of your promise of good governance.

Why are such write-offs bad governance? First, they unfairly benefit those with the best access to the banking system: developed regions, upper castes, and better-off folk. Poor, low-caste peasants say they cannot dream of approaching a bank for a loan. Most farmers borrow from moneylenders at high rates of interest. So, writing off bank loans rewards the most influential farmers with the best access to banks and lowest rates of interest, while leaving out those with the least access and highest interest rates.

Second, many honest farmers have paid their loans on time. Waiving outstanding loans rewards defaulters, including deliberate defaulters who have no intention of paying up. They know politicians will periodically promise write-offs, so why pay at all? Such dishonest, cynical and calculating farmers will be rewarded by Naidu while those paying diligently on time will look like fools. That is bad governance with a capital B.

Naidu himself in the 1990s launched the scheme for bank finance to self-help women’s groups. The groups gave microfinance to members, and attempted other activities. The scheme was widely praised by domestic and international observers.

But if the bank loans are written off, the entire ethos of the groups will change from self-help to government dependence. Already repayment discipline in the groups was falling after the AP Government cracked down on private microcredit providers, and told borrowers not to repay. This destroyed private microfinance.

Naidu’s new move will destroy public microfinance too, converting it into one more freebie.

It makes no attempt to target the poor because its aim is actually to buy as many votes as possible, not reduce poverty or enable people to stand up on their own feet.

Nobel Laureate Mohammed Yunus, pioneer of microfinance, was scathing in condemning the earlier government murder of private microcredit in AP. He said people in distress should be given grants to pay off loans, but repayment discipline must not be eroded, since it would shatter the entire foundation of dignity and self-help that microfinance stood for.

Mr Modi, Naidu is not interested in dignity or self-help. He aimed to promise the moon to voters and then blackmail you into rescuing him.

Say “nothing doing”. If you dole out rescues only to states ruled by your allies and not others, your claims to good governance will collapse. You will be seen as just one more slimy hypocrite, a Congressman in saffron robes.

What do you think?