The amount of loans to small and marginal farmers that commercial banks, cooperatives and regional rural banks have been asked to waive is likely to be slightly over Rs 23,000 crore

, afigure that is less than half that estimated by Finance Minister P Chidambaram in his budgetspeech (see first graphic). The share of this due to commercial banks is probably in the regionof only around Rs 6,000 crore - the total overdue from all farmers to commercial banks isaround Rs 10,000 crore.

According to data culled out from the RBI's Trend and Progress of Banking in India, apart fromthe Rs 10,000 crore overdues from all farmers in favour of commercial banks, another Rs 3,000crore was overdue to regional rural banks and around Rs 25,000 crore to various co-operativesector banks. Of this, around 60 per cent, or Rs. 23,000 crores - was on account of small andmarginal farmers (defined as those with under two hectares of land) - this assumes the share oflarge and small farmers in overdues is the same as that for the total debt as revealed by theNSS rural indebtedness survey for calendar year 2003.

Also, while most commentators have assumed the loan waiver will hit further farm credit fromthe banking sector, this is unlikely to be true for at least two reasons. First, government-ownedbanks have to meet priority sector targets and so have to lend to farmers - which is why, afterthe Dandavate-Devi Lal loan waiver of 1990, farm credit continued to do extremely well.Second, farmers have a very good track record of paying back bank loans. RBI data (seesecond graphic) shows that while farm credit has soared, overdues have grown just marginally.The last year for which data are available, 2006, shows that apart from paying off current loans,the farmers were paying off a portion of old overdues as well. Thus, with this track record ofpayments, there is little reason to think that banks would be hesitant to extend fresh credit tofarmers. In any case, with bank loans the cheapest of all rural credit, it also makes most sensefor farmers to repay this first.

In terms of equity, the finance minister hasn't given the farm sector anything more than he hasgiven to lower middle class urban Indians. On average, with around Rs 23,000 crore ofoverdues from small/marginal farmers, this means that the average small farmer has got a giftof around Rs 3,100 a figure that's marginally less than the tax relief given to those earning 1.5lakh a year - with the income tax kicking in at Rs 40,000 extra, that's a Rs 4,000 tax relief forthose earning Rs. 1.5 lakh. The average person in the Rs. 1.1 to Rs. 1.5 lakh category willreceive a Rs. 2,000 tax benefit.

Though the finance minister has not spelt out details of how this waiver is to be made good tothe banks, including those in the cooperative sector, it is unlikely to make much of a dent in thefiscal deficit. Even if the entire Rs 23,000 crore is to be paid to the banking system in a year,rather than in three years as has been indicated by the finance minister in various post-budgetinterviews, that is less than one half of one percent of the projected 2008-09 GDP of Rs5,303,770 crore. If the money is to be made good in three years, the impact falls even moredramatically.