The trajectory on the macro-economic front does not look very rosy for the coming year. The Ministry of Finance reaction in the last six months has been to push the Reserve Bank of India to bring lending rates down. When the issue is no longer about lending rates, I have pointed it out earlier that the real issue is credit growth or expansion. In simple words banks are not willing to lend any more. Banks are not willing to lend as they are saddled with NPAs and are now focusing on capitalization. They are happy parking their funds with the RBI instead of lending.
The banking sector cannot be a driver of growth through low interest rates. The government can only spur growth by increasing capital spending. But the current Finance Minister has been playing it safe. Mr Jaitley cut capital spending in the last quarter of the ‘14-15 to meet his fiscal deficit number. If Mr Jaitley is watching the deficit number, RBI governor is watching the inflation number. I wonder who is watching the real numbers. Data on falling farm incomes, stalled investment in large projects, slowing consumption demand in rural areas.
The rural sector is the driver for at least 50 per cent or more of the demand for sector like consumer durables, two wheelers and even FMCG.
The unseasonal winter rains has already adversely affected the farmers income. Even if the monsoons are good, they will still suffer. The failure of one crop for the farmer means that they don’t have the resource to buy seeds for the next crop. They will borrow and buy seeds for the season after as the failure of crop means that their own seed bank will be empty.
An agrarian crisis is building up and it will get exacerbated with the delay in the monsoon. The Met department is forecasting a drought like condition with just 88 per cent rainfall. Anything below 90 per cent is considered a drought situation. The agrarian crisis should not turn into an economic crisis for the country. And it will if the government does not act now and act clearly. I have pointed out the need for addressing this in the past and reiterating it again.
There is a need to create seed banks and help farmers to buy seeds at an affordable price. This is never a part of the exigency plan of the government; their focus is always on making sure that the seeds are available. The challenge is that with one crop failure there is also going to be a seed failure that will follow as seed companies are not prepared with adequate seeds. This will be the next crisis and it will hurtle farmers towards bankruptcy and suicides. This is a vicious cycle as it will force the government to write-off loans, push free credit to the farmers — in other words create a new set of NPAs for the public sector banks.
The PSU banks are waiting for the inevitable on the farm front and it may be one of the reason that they are not lending to the industry. They are keeping their liquidity afloat as they do not want to look wanting when the government forces them into the new version of loan melas. A banking and agrarian coupling for the worse is not something that the finance Ministry or RBI can resolve. It is for the agriculture ministry to step up to the task and junk the past exigencies plan and look at the new paradigm. In the past corrupt ministers have kowtowed to the lobby of seed and fertilizers companies and avoided any clear action. This has to change.
The bigger question that still remains unanswered is that will the spiral of agriculture and banking pull down overall growth or will our industry step up and drive the economy. The past shows that this rarely happens. Incumbent industrialists rarely take a risk against economic tides. Therefore, it will fall back again on the government to drive capital spending if this crisis has to be avoided.
( K Yatish Rajawat is a senior journalist based in Delhi, he tweets @yatishrajawat)