The Indian Economy Blog

June 28, 2007

World Bank Offers $600 Million Loan To India

Filed under: Agriculture,Banking,Business — Dweep @ 6:03 pm

BBC News is reporting the World Bank has approved a USD 600 million loan to India, aimed at “helping millions of poor farmers across India” (original report at Reuters). The money will go to supplement a government sponsored program, worth USD 3.32 billion, to refinance India’s cooperative banks, which would then offer cheaper loans to farmers. That program was designed, at least partly, in response to suicides across the country by farmers that were unable to repay their debts due to failing crops. The bank justifies this loan, thus:

“By providing small farmers with improved financial services, such as credit, savings, remittances and insurance, this project will play a significant role in helping India’s rural poor benefit from growth opportunities,” the bank’s country director for India, Isabel Guerrero, said.

What growth opportunities? Ms. Guerrero must be deluding himself. That farmers are killing themselves should be enough to explain that lack of credit is not the problem – it is the inability to repay credit! Pouring more money into banks that cannot collect loans, from clients that cannot pay will not solve that problem. Improving water supplies, reducing US agricultural subsidies, and removing market distortions and government intervention in the agricultural supply chain might. Maybe Reliance can fix this mess.

23 Comments »

  1. I’m amazed at your twisted logic!

    Are you denying that there are growth opportunities in rural India for the poor?

    Or are you saying that easier access to credit will not help farmers free themselves from the clutches of local moneylenders?

    Or are you even saying that availability of crop insurance is not a good thing, something that will enable farmers to repay loans even during poor seasons?

    Just because there are other problems holding the rural poor back, it does not mean that people advocating (and providing) decent access to credit and insurance are “deluded”!

    Comment by shankar — June 28, 2007 @ 6:51 pm

  2. @ Shankar

    All the author is trying to say is that dont expect the problems of farmers to be solved because of this loan, as the problem is not credit. So while there will be marginal benefits from the billion spent, dont expect things to change anytime soon as, more steps will be required, especially infrastructure and a stable market etc etccc

    Comment by Rishav — June 28, 2007 @ 8:16 pm

  3. Not to mention removal of agricultural subsidies in the EU and the US, which is how most farmers stay afloat in these countries.

    Comment by Shefaly — June 28, 2007 @ 8:37 pm

  4. Thank you Rishav / Shefaly, for the qualification.

    Shankar, yes – I do believe easier credit will not solve the problem. Microcredit does not, generally, enable “growth opportunities”. Farmers may escape the “clutches of moneylenders” – for another set of “clutches”. See here for my views on microfinance, as opposed to financial inclusion and microinsurance.

    Comment by Dweep — June 29, 2007 @ 12:51 pm

  5. I think the problem with farmers not producing has to do with three or four structural factors including (a) complete government apathy resulting in low spending for farm infrastructure, (b) low spending on irrigation resulting in inadequate coverage areas, and (c) fragmented holdings denying farmers the ability to benefit from scale.

    Lower output and yields have led to lower realizations and hence the inability to service credit taken.

    Its shameful that we are taking to importing wheat as opposed to being a net exporter a few years ago.

    Cheers
    S

    Comment by Sumanth Cidambi — June 29, 2007 @ 3:17 pm

  6. Rishav / Shefaly – Thank you for the clarifications.

    Dweep – I agree that easy credit is not, by itself, going to solve anything. But my point was that it might be an essential part of a broader solution involving other elements you have pointed out. In that sense, i still think your original criticism was slightly excessive. Thanks for your reply anyway.

    Comment by shankar — June 29, 2007 @ 3:36 pm

  7. And, of course, we now know about people like certain “Pratibha Patil” ready to sink co-operative banks for the benefit of their relatives and cronies. money mostly is usually wasted on bad credits, it is a common story in co-operative banks. so many banks have gone down under…

    What fooled World Bank into not noticing this??

    Comment by ashish — June 29, 2007 @ 9:10 pm

  8. ‘Maybe Reliance can fix this mess’…….. No doubt they will give better price to the farmers for their produce and the farmers will gain in terms of better practices, market openings, etc. But in the process Millions of road-side retailors would loose their livelihoods AND then the political parties would start agitating in favour of retailors.
    In the BIG_FOOD_RETAILOR game the farmer wins, the retailor wins but the loosers are the mom n pop food sellers. At present the farmers only get around 16-35 % of the actual retail price of their produce!!

    Comment by Rahul — June 30, 2007 @ 4:49 am

  9. The World Bank has been conned (yet again) by politicians who benefit the most from the ‘refinancing of co operatives’. Most of these co operatives are run by politicians who then use that money for their own investments and default. Pratibha Patil was just the tip of a very corrupt iceberg.

    This is why many co operatives have been going under recently. The political managements defraud the farmers who’ve invested in the co operative and then seek financing from the government to help recover – money that is again siphoned away. Lovely scheme they have going there. It is good to see that WB doesn’t mind loaning the money to keep the cycle going.

    Comment by Alok — July 2, 2007 @ 5:12 pm

  10. I think Shefaly and Sumanth have hit the nail on the head in terms of farmers suicides. The subsidies which the Govts. of the developed nations give it’s farmers definitely makes our unsubsidized farmers unable to compete. Mounting loans which they cant pay back drive them to suicide. Plus the Govt. apathy and then they come up with such useless schemes like more credit.

    As for the world bank, may I remind people that the head of the bank is always appointed by the US. I wonder if they will use the examples of such loans to prove their ‘good intentions’ and thus not budge on their subsidy stand!

    Comment by Ardy — July 3, 2007 @ 5:48 am

  11. Credit is a step in the right direction, it is not the end-all-be-all solution as US-led World Bank might suggest. In order to avoid future repayment issues, I agree with Dweep’s assessment that more attention needs to be given to issues of irrigation/water supply, fair prices, and fewer US agricultural subsidies. The changes, of course, must come from all sides — a firm commitment from the Indian government to secure farmers’ livelihoods by improving rural farming conditions, activism on behalf of Indian farmer to trample US under-selling, international cooperation to provide not only the capital but also the education and training needed to bring Indian agriculture to international levels.

    In general, though, I do believe the US must over-haul its farm subsidy program, which not only contributes to health problems in the US (by making processed foods cheaper) but also undermines any attempt to create a just and equitable global economy.

    Comment by Literary Lady — July 3, 2007 @ 8:48 pm

  12. I think that that the farmers should get the subsidies that they have today (they dont make that much money anyway) but the consumer can still pay a slightly higher price for processed food if only the profit accruing from this can lead to better farming practices- better animal welfare, more organic farming etc.

    Comment by Revathi — July 12, 2007 @ 3:13 pm

  13. The problem is not credit, but cost of credit. A lot of farmers still rely on moneylenders and other sharks who could charge anywhere above 50%. And a lot of farmers get into a loan trap, where they keep servicing the interest alone. Though, I have not studied the suicide cases in detail, from my living in rural India with my father as a rural bank manager, I beleive no one commits suicide for not paying back a public sector bank. Most commit suicides due to inability to repay the sharks. PSU bank loans in a lot of rural sector is more like a grant than credit. Anyway, I believe it is the goal of government to expand the formal credit net to most of rural India and drive out the sharks.

    Comment by Balaji Viswanathan — July 12, 2007 @ 11:12 pm

  14. This is very interesting discussion. I wonder why the GOI opted to get another $600M from WB for this purpose? Was it a voluntary offer from the WB? If so, why? I do not know the full mechanisms of credit/lending.
    I have seen some nice articles about the WB in Prof. Alan H. Meltzer’s web site at the Tepper School of Business at Carnegie Mellon University. I consider Prof. Meltzer a brilliant economist. Some of you might visit his web site:

    http://www.tepper.cmu.edu/afs/andrew/gsia/meltzer/

    Easy credit is not always good for sustainability. If you have traveled from Delhi to Hardwar, you will see miles and miles of sugarcane? Sugarcane needs tremendous amount of water, fertilizer, and pesticides. It also takes a long time to harvest the cane. You can imagine these chemicals leaching down to these same poor farmer’s drinking water wells. Agriculture takes out most of the water from Western Ganga Canal which originates from Hardwar. Delhi is in dire need of water. I do not think Delhi gets much from this canal for its supply. The same applies Yamuna also. Municipalities have to treat sewage-filled river water to supply to their inhabitants. Mathura and Agra are not in any good shape. If crops with low water demand can be grown, a part of the could could become available to municipalities and the base flow in the rivers could be increased. In arid places like Israel, it is possible to grow income producing crops. Sugarcane may not be the right crop for northern India. On the other hand, there are places in south and central India where credit can help farmers. It is a complex problem!!

    My suggestion — let India stay out of WB if it can afford.

    Comment by C. Ray — July 13, 2007 @ 3:44 am

  15. Thank u to world bank’s kind heart

    Comment by Bhuvaneswaran — July 14, 2007 @ 11:22 am

  16. What is the real basis of aid? Nepal,Pakistan, Maldives,Silanka,Bhutan ,Afghanisthan ,Bangladesh also are full of poor farmers.World Bank should also consider the needs of assistant of other SAARC member states and facilitate with very large doses.If this loan is not effectively implemented it will just be burden.
    Narendra Bista
    Research fellow and economist

    Comment by narendra Bahadur Bista — July 15, 2007 @ 8:51 am

  17. Money and proper investment and financial education and management and the production movement , encouraging and helping attitude from education to help saving by production of fishery, production of domestic animal, cultivation of different type of vegitables in the peaseants own land and its proper scientific use and a cold storage for storeing the vegitables, meat, fish and other agricultural produce will help the poor peasant of our country. I have confidence that if i get the oportunity to do the fevour of world Bank than i will devote my whole time for the welfare of the peasant. I will leave my job for the purpose. I am a subdivisional engineer, of BSNl.

    Comment by Biswanath Mukherjee — July 20, 2007 @ 8:53 pm

  18. World bank loans can be dubious by intent and content (the amount), atleast in cases where borrowers are third world countries like India or superpowers like US. World bank loans are even used to fund militants pay for arms bought from some other countries who in turn help these poor assoles (even withourt asking for it) fabricate fake projects and poverty to obtain finance. Quote “By way of Deception by Victor Ostrovsky”. Israel helped pay the “costs of training” to Lankan Army by helping the Sri Lankan PM fake a project to secure a world bank loan. Who knows may be the world bank is a party to it. Its all the ploy of rich to keep poor in poverty for ever. As simple as that. No hi-fi analysis required. Why on earth is US the largest debtor to World Bank. Simple again,, its the contributions of these same third world countries to world bank deposits, that help these countries prosper. To be rich and in debts makes this whole mechanism works.

    Comment by Loknath — July 26, 2007 @ 11:15 pm

  19. [QUOTE]Its all the ploy of rich to keep poor in poverty for ever[END OF QUOTE]

    I agree completely – these evil capitalists, I tell you! It’s all their fault. The fact that communist/socialist regimes all over the world have failed their people spectacularly is only because of capitalists and monopolists.

    Ahh..longing for the glory days of Stalin, Mao and public executions.

    Comment by Ace — August 23, 2007 @ 4:01 pm

  20. Optimism of positive sprit must be there. There is a need of rectification of procedural defect of disbursement prevailing in India. A tact to discourage vested interest should be evolved.

    Comment by Dinesh Pratap Singh — September 7, 2007 @ 1:50 pm

  21. Respewcted sir,
    I am an economic student.I want to know about the current total loans account credited by the world bank to india & i want to know the financial status in environment.so kindly refer this and reply soon.i will waiting for your reply.

    thanking you
    yours truely
    kannan
    (INDIAN)

    Comment by Kannan — October 3, 2007 @ 7:51 pm

  22. Kannan,

    Total debt Maturity for India as of 2005 is around $110 billion.

    Comment by Nikhil Nayak — October 3, 2007 @ 11:55 pm

  23. oops hit the submit button too soon … just wanted to say that I think this is the figure. Debt maturity is the date on which a debt becomes due for payment. Numbers I could find are for 2005. They should be higher as of 2007 I would imagine.

    Comment by Nikhil Nayak — October 3, 2007 @ 11:58 pm

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