EPA

Bags of debt relief

ANGANWADI (courtyard) centres look after infants and pregnant women in India's villages and slums. Those who run them feed the children in their care yellow dal to guard against malnutrition and weigh them regularly to keep track of their growth. They help get them immunisation jabs and lead them in songs. Many say they take great pleasure in their work, which is just as well since the stipend is a meagre 1,000 rupees ($25) a month.

But on February 29th India's finance minister announced he would raise the monthly stipend of anganwadi workers to 1,500 rupees. It was one of innumerable benedictions dispensed in his budget, the last before the governing United Progressive Alliance, led by the Congress party, has to call an election. Palaniappan Chidambaram had 7.5 trillion rupees to spend. His speech sprawled over 187 paragraphs, stopping to quote an ancient muse, two dead prime ministers and one live one. He found time to protect India's tiger, exempt earnings from pot plants, and tax unfiltered cigarettes as heavily as filtered ones.

Mr Chidambaram's coffers are full, thanks to India's fine economic performance. The economy is expected to grow by 8.7% this fiscal year, which ends on March 31st, having grown by 9.6% and 9.4% in the previous two. The hills are alive with the sound of tax revenue. The exchequer will take 24% more this year than last.

These buoyant revenues have allowed the finance minister to meet (give or take) the fiscal rules his government wrote for itself in 2004. He has narrowed the central government's deficit to 3.1% of GDP this fiscal year, compared with 4.5% when he took office in 2004; he predicts a budget gap of just 2.5% in the year to come.

But these figures take no account of a forthcoming pay commission, which meets every decade or so to set the salaries of the government's vast retinue of employees (see article). Unlike anganwadi workers, these public servants expect generous remuneration. The commission's recommendations, due on March 31st, will cascade through the public finances. After the last one, the annual cost of public pay and pensions eventually swelled by 600 billion rupees.

Moreover, the economy is beginning to stumble. Corporate profits provided a quarter of Mr Chidambaram's revenues this fiscal year but industrial production is slowing. The slowdown may return India to about 8% growth, possibly a more sustainable rate. But Mr Chidambaram seems to view this as a shortfall from the 9-10% growth to which India is entitled. He cut duties on scooters and small cars to boost demand. He also raised the amount people can earn before they pay tax.

One area of the economy that is undeniably stagnant is farming, which will probably grow by just 2.6% this year. Too many Indians still rely on the land, and too much of the country's arable land depends on the vagaries of the monsoon. Over 17,000 farmers killed themselves in 2006, according to one estimate, often to escape unpayable debts.

Relieving farmers' debts, India's opposition parties decided, was a vote-winner. They resolved to bang on the doors of Mr Chidambaram's treasury, raising a racket that would carry them to victory in state polls this year, or even a national election in the autumn.

But the doors were already open. In his budget Mr Chidambaram promised to wash clean the slates of about 30m small farmers by the time the next monsoon falls. Another 10m larger landholders can choose to repay 75% of their debts, and have the remainder written off. The bail-out may not reach those on the verge of desperation, who tend to be bigger farmers taking gambles on cotton crops. Nor will it help those in hock to loan sharks, whose lending is beyond the government's reach. But by making it easier for farmers to take out fresh loans from reputable institutions, it may stop them turning to moneylenders in the first place.

Such largesse sounds wonderful, but a dramatic cancellation of loans could raise doubts about the rural-credit culture. Loan forgiveness, says Y.S.P. Thorat, a former chairman of the National Bank for Agriculture and Rural Development, is like “hot milk. You have to keep blowing on it.”

If managed properly, however, it should not do too much damage to “repayment ethics”, he says. The kind of small farmers targeted by the scheme tend to be the most reluctant to default, he argues. They are “too much in awe of the system” to abuse it.

The write-off will put another burden on India's public finances. But it succeeded in wrongfooting the opposition parties, who did not expect such generosity. The farmers themselves were cannier. In the months leading up to the budget, Mr Thorat says, there was a noticeable slowdown in loan repayments.