The Rs 30,000-crore farm loan waiver announced by Maharashtra, if implemented, would take the state’s fiscal deficit in 2017-18 to 2.7% of gross state domestic product (GSDP) from the recently budgeted 1.53%. On the face of it, this might not look a very precarious prospect as even the enlarged deficit due to the largesse is well within the combined 2017-18 limit of 2.82% recommended for states by the Fiscal Responsibility and Budget Management (FRBM) committee (NK Singh panel) recently.
But there are reasons to worry: First, it can’t be assumed the state would have stuck to the budget target if it had not given the relief to small and marginal farmers (despite almost meeting revenue targets, the state had a deficit of 2.22% in FY17, against the targeted 1.54%, as expenditure rose).
Given the likelihood of sustained government spending in a stuttering economy, the state’s actual deficit in the current financial year would have been higher in any case. Second, being a “manufacturing state”, it is facing some uncertainty over sustaining tax revenue buoyancy in the upcoming goods and services tax (GST) regime; at least in the initial months it could feel transition pains. From a federal perspective, a slippage by a major and conventionally fiscally responsible state like Maharashtra could have major fiscal implications for the country’s overall fiscal situation and public debt position.
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Third, the actual fiscal slippage by states in 2016-17 is seen to be higher than what the Singh panel estimated: When the panel saw combined fiscal deficit of states in 2016-17 at 2.98%, it did not have the benefit of latest numbers as several states put out the revised estimates for the year later as they presented the 2017-18 budgets in the respective state assemblies. Based on the data till November last tear, JPMorgan had predicted that the Indian states’ combined fiscal deficit might touch a 13-year high of 3.4% in 2016-17 (excluding the cost of the UDAY scheme for power distribution companies). The truth could be somewhere between the two estimates.
The Singh panel, which proposed a ceiling on general government debt (both Centre and states) of 60% of GDP by 2022-23, had allowed states to maintain their debt GDP ratios at 2016-17 level (21%) through the fiscal consolidation in the form of a steady but modest reduction in the primary and fiscal deficits over an eight-year time-frame. However, states, it said, would still need to cut their fiscal deficits by 16 basis points a year from the estimated 2.98% in 2016-17 if they want to achieve the current debt-to-GDP ratio of 21% again in 2024-25.
With Maharashtra following Uttar Pradesh in waiving farm loans — the northern state had announced a Rs 36,359-crore loan waiver for about 94 lakh small and marginal farmers in the state on April 5 — the chances of other states following suit have increased. There are already demands from farmers in Karnataka, Tamil Nadu and Punjab for similar packages.
A report by Bank of America Merrill Lynch on Monday warned that farm loans worth $40 billion, which is equivalent to 2% of India’s GDP, will be written off by India’s state governments in the run-up to 2019 elections. “We grow more confident of our call that farm loan waivers will spread across states after Maharashtra followed Uttar Pradesh,” its analysts said in a note. Such moves will also be counter-productive to the Reserve Bank of India’s efforts at cleaning up the non-performing asset-saddled bank balance sheets, the firm cautioned.
On its part, the Centre hasn’t pledged any support to the states’ farm loan waivers even though it did not expressly restrict such profligate moves either. “If a state has its own resources and wants to go ahead in that direction, it will have to find its resources. The situation where the Centre will help one state and not the others will not arise,” finance minister Arun Jaitley said in Parliament recently.