The convergence of the ridiculous and the sublime

Sometimes we witness something which at first glance appears quite ridiculous. The nationalization of Indian banks by Mrs Indira Gandhi was one such act. There was no real need to do it except some political  reasons for the same (more on this here and here too). No doubt, this was unnecessary and could have been easily accomplished by regulating the banks well. But this perhaps suited the the very short term political objectives of a cornered politician namely Mrs Gandhi.

However history has given this a new twist.  For reasons beyond the ken of the originators of the idea of bank nationalization, it has turned out to be a sublime idea. Through the nationalized banks, the Indian government controlled flow of credit, consumed much of the credit itself  and choked the Indian economy.  So much so that in the early 1990s, the Credit Reserve Ratio (CRR) and the SLR (Statutory liquidity ratio) was a combined 53% (up from 27% at the time of independence and 32% at the time of bank nationalization.(Chronology of CRR / SLR changes Source: RBI website)

This was patently ridiculous at the normal level of analysis but it accomplished many things which Mrs Indira Gandhi never could have visualized. India entered the credit based growth game too late and hence the credit fueled bubble that  has propelling the world economy since the collapse of Breton Woods did not affect the level of credit and loans in India. The low home loans to Nominal GDP ratios is instructive in this regard. Even today it is only  8 % of India. This is very low in comparison to Western countries and developed Asian Countries like Singapore (54%), Korea (36%) or other European countries such as Germany (47%) or UK (85%) or the US at 77%.

This has definitely saved us from the  mad consumption fulled economic rise and the implosion that is happening/will happen in these countries  following the collapse of credit availability  If you wake up too late and run a race where people are running very fast for a long time ( albeit in the wrong direction), you will be the last in the race. The upshot of this  means when the reality of credit filled booms and busts sinks in we would have run the least distance in the wrong direction and be in the best position as we are in now in 2013!

This is the sublime effect of bank nationalization.

We maybe witnessing another ridiculous/sublime convergence today. The Food Security bill which is being pushed through now could  have such effects. It is being pushed through at this time because of political compulsions rather than national compulsions. There are a hundred other ways to ensure that all people have food but none of those will make the Opposition look in bad light and the ruling Government look in good light. Thus the nation will have its Food Security bill.

This decision is ridiculous because it assures food to farmers, whose precise job it is to provide food to others in society. Arguably, this violates the basic social compacts in society.  This will drive out many marginal farmers from farming and could reduce incentives of many farmers to produce food, as food is to be given to them at such low rates. We could see substantially higher food prices as a result. Once food prices go up usually there is incentive for marginal farmers to produce food but under this system, if food is made available to them at ridiculous prices along side assured income from employment guarantee schemes - they may just decide it is not worth sweating it out in the sun.  Already most of the farming families have partly diversified out of farming. This will expedite it a full diversification out of farming for those who own small and  marginal farms. Thus increasing food prices may not lead to increasing food production but will lead to increasing consumption as the food is sold at heavily subsidized prices.

Thus it is likely to be a ridiculous outcome but there are likely to be many unintended outcomes. Increasing food prices will shift a lot of the economic power from the cities to the villages. This could reduce migration, improve opportunities at the village, modernize the village as the increasing affordability will quickly lead to urban facilities being available at rural areas. This is already happening in many states but it will happen faster and in all states including states like Bihar where this transformation is in its infancy. There is no magic bullet like prosperity to solve many problems. No doubt it will cause new problems but these problems of plenty are likely to be  a welcome situation than a large part of the country languishing helplessly with very little choice. If this prosperity arrives, the farmer will be an empowered decision maker and his political choices may be pro-development rather than poor thereby destroying the pro-poor political model of the political agents who bring about this prosperity.

It could reverse the catastrophic loss of income earning power of land brought about by Mr. Jawaharlal Nehru's Green revolution wherein the production went up with increasing cost of production thereby reducing the profits/surpluses of farmers drastically.  The Green revolution ensured the country gained everything and the farmer nothing.

It could make India a net buyer of food when the Common Agricultural Policy (CAP) of Europe and the US Food policies may be on their last legs. It could alter the relative price of food with respect to services, energy and manufactured goods and  practically everything else. This could make India's economic and social position very strong as a very large number of people are dependent on farming or are living in areas where farming is the main economic activity.  This could also cause a shake out in the cities as it may be very costly to live in the cities. Land prices may become more affordable in the cities.

Who knows it may be the magic bullet on our march to superpower-hood. This could be the sublime aspect of the Food security bill.

Should we welcome it or not ?