Farmers 038; dollars: Small savers, big changes

When I occasionally stay overnight in Delhi, my friends in power ask me why the coloumn doesn8217;t reflect Boomtime India. Of course, the boom in the country as a whole hasn8217;t left villages untouched. But it8217;s only the creamy layer. In a traditional village from where I had recently reported the frail impact of urban India, the richest farmer had just come back with his family from a trip to Egypt and was quite articulate about babaghanou and mezza. He and three others were farming about seven per cent of the land in the village, having leased land from smaller farmers who had left for the lures of the city. Let8217;s not get carried away, the so-called rich farmer still does not till more than 10 hectares each, unless I have got the conversion from bighas to hectares wrong.

This column today is on the farmer and, of all things, capital account convertibility. As Planning Minister, I advocated capital account convertibility as the ultimate guidepost of the slow and sure reform we had started in the mid-Eighties. The world was against it since the East Asian meltdown had tempered the rah-rah enthusiasm of the early reformers but my argument was that they were wrong then and could be wrong again. Sure and steady reform does not mean standing still and the time was ripe, some of us argued, to move cautiously and firmly towards covering the last mile. This was a rather lonely battle in Yojana Bhavan, but finally, the approach paper of the Plan said: 8220;Capital account convertibility will be sought to be achieved by ensuring that the prerequisites for such convertibility are attained.8221; The original Taraporewala Committee was set up and spelt out the conditions, but we went back to slumber, until the present government started it again.

What has all this to do with farmers? My panwalla is from good peasant stock since the part of Ahmedabad I stay in was a village not many years ago. He has always been savvy on share markets. But he was quite taken up with the idea that we can now invest 50,000 a year in foreign assets or bank accounts. Ever since I was a student at Penn, I heard the argument that the dollar would collapse, for the pundits said the world would keep on lending forever to the US to shore up the dollar and its budget deficits. But it didn8217;t happen and it is fellows like my panwalla who shore up the dollar. As they make their first lakh and more, they want assets which have good collateral and the greenback is such an asset. Gold is another. When a large number of small lakhpatis save and want to put it in assets backed up by collateral, the gross effects are high, for as Keynes taught us, don8217;t generalise too easily from the individual to the nation. A large number of small savers can have more impact than a small number of large ones.

Some have used this to argue that this behaviour of savers in a fast-growing labour-abundant economy is inevitable and will lead to a saving glut. Since capital will flow only if profits are high and foreigners hardly ever invest in poor agricultural areas. Capital will flow to the areas which ensure high profits. Last week, invited to a global meeting of central bankers, the IMF and ADB at Bali, I argued that it is not inevitable that nirvana in villages will come only in the long run, for truly in the long run many will be dead.