The Reserve Bank of India on Wednesday warned of inflationary risk and the fiscal situation getting out of hand if states continue to waive farm loans, unless there is existing fiscal space in state budgets or some space is found. “The monetary policy committee (MPC) resolution says the risk of fiscal slippages, which by and large can entail inflationary spillovers, has risen with the announcements of the large farm loan waivers,” Patel told reporters after announcing the bi-monthly monetary policy. Patel said the risk of going down the “slippery path’ of waiver could dissipate the important gains that states made in fiscal rectitude over the last two-three years. “Past episodes in our country had shown that when there are significant fiscal slippages they do permeate to inflation sooner or later. So, it is a path that we need to tread very carefully and before it gets out of hand,” Patel said. His comments come at a time when the state governments in Uttar Pradesh (UP) and in Maharashtra have announced large-scale farm loan waivers.
Patel had said in the April policy that loan waiver schemes engender moral hazard and undermines an honest credit culture. He had added that it also entails, at the end of the day, transfer from taxpayers to borrowers. “If, on account of this, overall government borrowing goes up, yields on government bonds also are impacted,” Patel had said.