Loan waivers keep people poor

Hori Lal is 70. He cultivates one acre of potatoes assisted by his three sons, their wives, and ten grandchildren. He took a loan of a little more than a thousand dollars in 2015.  According to calculations made by a Hindustan Times reporter, he loses about 300 dollars, not counting his family's own labour, each season. This, assumes that he has a good harvest and manages to sell it all at the high Government support price. In the past, there have been years when Hori Lal got nothing.

Why does Hori Lal cultivate potatoes when he knows he will lose money? He says 'What else can we do? This is what my family has always done. This is all we know. At least, it gets us some vegetables for the home.” Lal says sending his sons out to work is not a solution: they were unskilled and would get Rs 250 ($4) as labour charges for a day, which they could get in the village too. “At least we are together.”

. (Deepak Gupta/HT Photo)

Should we believe Hori Lal is telling the truth? No. Of course not. Nobody can be that stupid. He must be borrowing as much money from the Government as he can, promising to grow an unprofitable crop, because he knows he won't have to pay it back. In his position, we would do the same.

Any elected Government is going to want to keep Hori Lal and his family on their acre and a half of land at the price of regular loan waivers. His family probably has ten voters at the moment and that number will only go up.  So writing off a thousand dollars of debt every couple of years is a pretty economical way of buying votes.

There is a twist to this story. It has to do with minimum support prices. People like Hori Lal do actually grow potatoes, not because they are dependent on selling them to cover their living expenses- they do that by availing of other Government schemes and also labouring for contractors- but because it can be an enticing speculation- potatoes can suddenly spike in price yielding them a windfall. However, this can only happen if there is no minimum support price and thus 'cowbeb' like price volatility. Notice that it is speculative behaviour, not adaptive expectations, which enables this volatility. Yet this speculation is of a peculiar sort- punters seem to be betting on the stupidity of their own class- Hori Lal's labour in his potato field is the moral equivalent of the West's urban poor spending a portion of their dole on scratchcards.
This is an example of Muth Rational Expectations creating a repugnant type of negative sum stochastic game absent moral viciousness. But why? There can be only one explanation. Hori Lal and his ilk are doing something extraordinarily eusocial. They are sacrificing a portion of their own number so at least a few can climb out of their common poverty trap over the corpses of their fellows. Needless to say, that trap was not dug by them but for them by bien pensant elites.

In this case, marginal producers like Hori Lal are squeezed out by support prices intended to shore up their miserable standard of living. The contract farmers benefit, agribusiness benefits, corporate supply chains are protected, everybody wins- except Hori Lal. Why? Well, his credit has been shot to pieces. Had he grown nothing on his land and sent his sons off to the City to work, he could have raised about 70,000 dollars on one acre, or more than 100,000 if he sold it outright. As things are, he is shut out of the relevant credit market.  This is a pity because a scarcely literate (and therefore trustworthy) yeoman who commands the labour power of three hard working sons and ten grandchildren should be able to raise 50,000 dollars with a low real interest rate 50 percent mortgage, and generate a gross contribution three times that in the far less inherently risky small scale tertiary sector.

This is a case where what is good for Hori Lal is also good for the Economy. He and his family- assuming they have the sort of work ethic common in the area- will be affluent in a decade and wealthy in two.  Instead of being a drain upon the exchequer, they will be paying more and more into it.

Why does the State not want this outcome for Hori Lal? The answer is that, at the moment, politicians giving Loan waivers believe they are purchasing votes cheaply. They dread the day when they have to deliver something more substantial. Since the Administration- from the 1890's onward- too dreads that day, both politicians and administrators have conspired to shut Hori Lal out of informationally efficient credit markets, preferring instead to corral them into an informationally inefficient, incentive incompatible, welfarist 'pooling equilibrium' such that the representative agent is forced to be either stupid or a liar or a particularly stupid liar. Indian Social Science is not similarly constrained but displays its empathy for the surd and subaltern masses by being nothing but a bunch of stupid lies.