Farm credit seen rising up to 10% during election years

Ahead of the Lok Sabha polls this year, a study by Harvard Business School said that government-owned bank lending in India rises in election years, with agricultural credit increasing by 5-10 per cent during such phases.

Public sector banks lend loans in districts in which elections are very close and the ruling party in the state had a narrow margin of victory earlier. Interestingly, no relationship between credit and elections was observed for private banks, it said.

The findings of the study “Fixing Market Failures or Fixing Elections? Agricultural Credit in India”, conducted by Harvard Business School, showed “agricultural credit issued by the public sector banks is lower in the years that were four, three and two years prior to an election than before election years”.

“The estimated effect of 5-10 per cent higher levels of credit in election years is substantially (more) than the average annual growth of credit,” the study said, concluding that effects could be reduced by isolating government banks from political pressure.

The study analysed the credit data maintained by the Reserve Bank of India (RBI) and statistics on assembly elections between 1992 and 1999 in 19 states. The study presents evidence that public sector banks serve the electoral interests of politicians and how resources are strategically redistributed.

Noting that politicians egg on banks to write off loans following elections, it said that a pattern separate from lending was observed for loan write-offs.

“Write-offs are (the most) in the districts in which the winning party enjoyed the greatest electoral success. This pattern is observed only following an election, nor prior to it,” Harvard Business School said.

It further said, “The popular press contains many reports of these political promises. For example, in 1987, the Chief Minister of Haryana promised to write off all agricultural loans under Rs 20,000 during the election campaign. Following his victory, he held his promise.”

“Agricultural credit is ... attractive for politicians to manipulate, the benefits are transparent, while the costs are not. This makes it hard for opposition politicians to criticise efforts by those in power,” said Harvard Business School, quoting from another report.

For politicians, focusing on farm credit makes sense because the majority of the Indian population is dependent on the agricultural sector, it said.