The burden of farm loan waivers could be as much as Rs 2.2-2.7 lakh crore if all states start offering the relief and would stoke short-term deflationary shock in an economy yet to gain full momentum, the Economic Survey for 2016-17 (Volume-II) said on Friday.
Even if only the five states that have made the announcement to implement the loan waiver (Uttar Pradesh, Karnataka, Maharashtra, Punjab, and Tamil Nadu) keep their commitments, the estimated impact could be Rs 1-1.25 lakh crore, it said. These estimates assume that all states could follow the UP model of waiver — up to Rs 1 lakh only for all small and marginal farmers.
The survey estimates that loan waivers by all states could reduce aggregate demand by as much as 0.7% of GDP, imparting a significant deflationary shock. This is mainly due to the fact that states funding the loan waiver would have to prune spending and possibly raise taxes to improve revenue and stick to their fiscal deficit limit of 3% (Though for six states — Odisha, Chhattisgarh, Telangana, Madhya Pradesh, Karnataka, and Bihar — the limit is 3.5%), although private demand tends to get a boost. The Centre has already made it clear that it will not offer any special package to states for farm loan waivers and they have to fund it on their own, while adehering to the fiscal discipline.
The survey factors in four effects while estimating the impact on aggregate demand: Impact on private consumption via increases in net wealth of the private sector; impact on the public sector through changes in government expenditure/taxes; crowding out impact of higher state government borrowings and crowding in impact via higher credit availability as bad loans of bank fall proportionately.
However, it suggests that this is the upper bound and the actual impact will hinge on the number of offering the dole-outs and and how they distribute them over time.
Although these five states have so far announced the waiver, there is a “possibility of a contagious spread to other states”. But the Supreme Court has stayed Madras High Court’s decision to provide loan waivers to all farmers instead of only to small and marginal ones, as announced by UP.
For states with fiscal space, loan waivers would add about Rs 6,350 crore to demand via the additional interest costs. However, for states without such space, waivers could trim demand by about Rs 1.9 lakh crore. Uttar Pradesh has announced waivers of up to Rs 1 lakh for all small and marginal farmers, while Punjab’s limit is Rs 2 lakh for small farmers without defining who these are and Karnataka has limited the waiver amount to Rs 50,000. But Maharashtra’s waiver terms are still unclear, the Survey said.