New Delhi: Finance minister P Chidambaram, in the Lok Sabha, put some concrete figures on his earlier "magnanimous" gesture of waiving farm loans in his Budget speech on 29 February.

In a line, the sum toto of his speech was that taxpayers' money would go towards funding what many have decried as a populist gesture brought about by impending general elections next year.

In this context, finance minister Chidambaram has made plans for extending his current tenure as the finance minister, by stating that the affected banks and institutions would be repaid over a period of three years.

One wonders what a new finance minister, if so elected and selected, would have to say about Chidambaram's practice of planning for the future.

Even though banks would still be affected, particularly the co-operative and public sector ones, analysts on Dalal Street welcomed this announcement of having cleared the air somewhat. The representative index of bank stocks in the Bombay Stock Exchange, the 18-member Bankex, has lost 18 per cent since the budget announcement, partly driven by the perceived losses for banks, coupled with the general global economic downturn. One will have to wait till Monday to determine the effect the minister's speech has on bank shares.

"Higher growth has ensured revenue buoyancy and because of revenues, we have the confidence to spend on projects that we could have never imagined before,'' Chidambaram said in parliament today. The "financing of the package should be relatively easy given the buoyancy in revenues and efforts at expenditure restructuring," he said. Chidambaram is of the opinion that increasing tax collections in the future will fund this loan waiver, requiring the government to borrow little, or not at all, from external sources.

He also declared provisional numbers of the loan waiver, while emphasizing that the RBI and NABARD have been asked to submit detailed figures by 20 March. He estimates the total waiver to be around Rs60314 crore comprising Rs50524 crore of debt waiver to small and marginal farmers, and Rs9790 crore as relief to other farmers as a one-time settlement at 25 per cent of their outstanding loan amounts.

This would, in his opinion, benefit three crore small and marginal farmers and one crore other farmers, with the former taking up 84 per cent of the package while the remaining 16 per cent benefiting the other farmers.

The government will compensate the lending institutions in 36 months beginning July 2008, by providing cash equivalent to the farm loans waived off, Chidambaram said. The government of the day is supposed to do that over three years starting from 1 July 2008, in unequal tranches of Rs15000 crore, Rs12000 crore and Rs8000 crore respectively, after paying Rs25000 crore immediately after 30 June, 2008. The time period of these three years, namely 1 July 2008 to 30 June 2009, 1 July 2009 to 30 June 2010, and 1 July 2010 to 30 June 2011, in Chidambaram's words, "spans three agricultural years while, at the same time, the period falls within four financial years for the purpose of Government accounts." He has also set aside an additional Rs10,000 crore for the package in what he calls "year zero".

Chidambaram expects the farm waiver procedures to be completed by 30 June this year so that the affected farmers become eligible for new credit at the earliest. He also promised to selectively extend liquidity to co-operative banks over scheduled commercial institutions.

The finance minister is quite upbeat about the source of financing, citing the rapid growth of the economy and buoyant tax collection figures. Justifying his stand, he said, "The burden in any single year will not be more than 0.25 per cent of GDP. Actually, it will be 0.25 per cent in 2008-09 and will decline in every successive year and will be only about 0.1 per cent in 2011-12".

In conclusion, the finance minister has managed to clear some misconceptions while reinforcing some other suspicions. Although the financial system will still take a hit due to this largess, one cannot disregard the utility this package has towards the ailing farm sector. Only time will tell the correctness of Chidambaram's and the UPA government's claims. ( See: Full text of the finance minister's speech )