Political Maneuver? Think Again.

17th November 2016

Whether one hailed the Prime Minister's move to demonitise currency notes of Rs. 500 and Rs. 1000 or found themselves obloquious of the same, everyone seemed to agree that this move was timed well for UP and other upcoming local and state elections. We too gave into the notion and thought for a while that we were right; after all it did indeed claim a victim as well- AAP in BMC polls (or the timing of the same was fortuitous).

Alas, be it sheer altruism or mis-calculation of risk (in politics always believe the latter) it seems that this move could very well be BJP's undoing in the upcoming local and state elections. The evidence of this is seen in the front page ad of the newspapers today articulating and reiterating the difference between a bad loan write-off and waiver. The PSU banks are writing off 63,000 crores worth of bad loans as they are flushed with liquidity and have (finally!) the ability to provide for the same in their balance sheet. The sheer amount of financial jargon I have used in the previous sentence demonstrates the ease with which the opposition parties/ forces can convince people that a loan write-off constitutes as a waiver. The strain the farmers find themselves in today make them a vulnerable target for such disinformation; the strain for which the government cannot be blamed but can be held responsible for now, thanks to the multitude of its opposing forces.

District Co-op Banks are not allowed by the RBI to participate in the exchanging of demonitised currency notes. Customers are simply allowed to withdraw from these banks- the problem herein being, there are no new currency notes stocked with them. Time and again RBI studies have suggested money laundering activities being facilitated by such banks.  Reports of politicians using the technologically challenged co-op banks to issue back-dated FDs post the PMs announcement surfaced post which the RBI, in a statement dated 14th November 2016 excluded the banks from this process (opposition parties' officials at the helm of these banks could also be a motivator). The price of one another shall pay.

Of the 8 crore cultivator households in India, 7.5 crore take some form of loan for cultivation from a financial institution. 3 crore of these take it from these banks, though the share of these co-op banks in the credit flow is at a lower 29%. 66% of the loans made by such banks go to small and marginal farmers, a proportion higher than the 55% for commercial banks.These banks have an unsurpassed outreach at the grass root level and therefore crippling them, even for the right reasons, would agitate the farmers.

Loans against warehousing receipts by NABARD are not viable as well since the farmers are unable to move their produce. 50% of the country's truck drivers are currently idled- to an extent, possibly purposefully. The harvest is piled up at farms (a gross but not entirely incorrect generalization on our part) inhibiting income flow and co-op banks are disallowed from the currency exchange program hindering credit flow. We may face an issue of food price inflation before the promised wonder of structural disinflation kicks in.

In view of such a liquidity crunch faced by the farmers during the Rabi season preparation time, the local political forces  seem to be milking the situation to the greatest extent possible by claiming a PSU bank's write-off, to be a 63000 crore central government waiver to the industrialists.

Add to this potent mix, the local politicians giving away their accumulated unaccounted cash to farmers as a short term crop loan (interest- free!) and voila! not that smartly timed after all it seems. The government's intention were not in anyway misplaced, but they underestimated Indians' aptitude for engineering (financial included) and overestimated the nobility of their opposition/ peers (though when not in power they would have possibly done the same).