1. Karnataka farm loan waiver: CM K Siddaramaiah jumps on bandwagon, waives Rs 8,165 cr loans

Karnataka farm loan waiver: CM K Siddaramaiah jumps on bandwagon, waives Rs 8,165 cr loans

Karnataka on Wednesday announced a crop loan waiver of up to Rs50,000 per farmer that would benefit over 2.2 million people but could cost the state an estimated Rs8,165 crore.

By: | New Delhi | Updated: June 22, 2017 6:23 AM
Karnataka farm loan waiver, farm loan waivers, state farm loans Karnataka on Wednesday announced a crop loan waiver of up to Rs50,000 per farmer that would benefit over 2.2 million people but could cost the state an estimated Rs8,165 crore.(Reuters)

Karnataka on Wednesday announced a crop loan waiver of up to Rs50,000 per farmer that would benefit over 2.2 million people but could cost the state an estimated Rs8,165 crore. The state joined Uttar Pradesh, Maharashtra and Punjab in announcing limited farm loan relief in recent months, taking the combined costs to their exchequers to around Rs85,000 crore. Apart from disrupting fiscal consolidation, the large-scale loan waivers have the potential to slow farm credit growth. Official data showed that between FY04 and FY08, while the average annual farm credit growth touched 30.3%, it dropped sharply to just 19% in the five years (from FY09 to FY13) after the UPA government’s 2008 announcement of crop loan relief.
Worse, such loan waivers usually squeeze the fiscal space meant for capital spending to boost growth.

Even without factoring in the loan waivers, the gross state development loans issued by the state governments are to rise from Rs 3.8 lakh crore in 2016-17 to Rs 4.5 lakh crore in 2017-18, according to an Icra estimate. If the UPA experience is anything to go by, says a Credit Suisse report, such waiver processes take several months to complete and until then banks tend to slow lending in areas where repayments stall, much to the dismay of farmers. A sharp slowdown in lending to the farm sector could shave 1 percentage point off the system loan growth, it estimates. Farm credit growth in Andhra Pradesh/Telangana plunged from over 30% in 2011 to under 5% in 2016 following the loan waiver announced by the central government in February 2008 that took two-and-a-half years to complete.

You May Also Like To Watch:

Moreover, debt waivers are likely to necessitate further debt raising by the state governments, which would increase the yields at which state development loans (SDL) are raised and widen the spread relative to central government securities (G-sec) by as much as 100 basis points or more during the second half of this fiscal, said Jayanta Roy, group head (corporate sector rating) at Icra. Such waivers also contribute to crowding out the private sector from accessing the bond markets at competitive rates. The farm loan relief announced by Maharashtra is expected to take its fiscal deficit in 2017-18 to 2.7% of its GSDP from the recently budgeted 1.53%. Similarly, the Rs 36,360-crore loan waiver announced by UP is a substantial 2.6% of its GSDP.

If the states finance the waivers out of their budgets, the deficits will surge in 2017-18 and if they choose to issue off-budget bonds, the fiscal numbers will be affected less in the current year but would invite questions of credibility. Already, the NK Singh panel has recommended that states need to cut their fiscal deficits by 16 basis points a year from an estimated 2.98% in 2016-17 if they want to achieve the current debt-to-GDP ratio of 21% again in 2024-25. Although the Centre has already made it clear that states announcing farm loan relief will have to do so from their own resources and that it wouldn’t offer any special package to them for this, it, too, did its bit when the Union Cabinet announced the extension of an interest subvention scheme for short-term farm loans that could cost it Rs 20,339 crore in 2017-18. Bank of America Merrill Lynch predicted that various state governments would waive Rs 2.57 lakh crore (2% of GDP) worth farmers’ loans in the run-up to the 2019 general elections.

  1. No Comments.

Go to Top