The loan waiver for small and marginal farmers, the first decision taken by the new cabinet in UP under Yogi Adityanath, will benefit about 1.83 crore farming households, with average land-holding of less than one hectare, that cannot provide sustenance to an average family. The farm loan waiver extends the BJP’s footprint firmly in the rural countryside, giving it a much larger electoral constituency. Yogi Adityanath is apparently treating his maiden tenure as chief minister as being only of two years as he aims to deliver tangible results by 2019. That is surely understandable. The BJP needs to show significant progress in UP before 2019 as that is a must for retaining power in Delhi.
Going by current realities, the recent waiver is surely not the first and will certainly not be the last farm loan waiver in the country. The grand daddy of such waivers was surely that announced by then finance minister P Chidambaram, in 2008; it required the commercial banks to write off a whopping `67,800 crore! That, like the present waiver, was entirely political, done as it was to ensure UPA’s re-election in 2009. These waivers bring temporary relief to poor farmers, who find themselves in unmitigated poverty immediately after the waiver which is simply no economic solution to their chronic problems. Going forward, Maharashtra chief minster Devendra Fadanvis has already shown his interest and Tamil Nadu High Court has ordered that all farmers’ loans be waived following the earlier waiver given to small and marginal farmers.
This trend is likely to continue as long as the present culpable culture in the country of construing bank credit as ‘non-payable’ and the resultant rampant moral hazard is not firmly rooted out. Farmers’ representatives are justified in pointing out that a start in tackling this pernicious, anti-capital formation culture, should be made by tackling the `10 lakh crore on non-performing loans given to industrialists. Farmer loan waivers seem literally puny when compared to the humongous mountain of outstanding debt owned by some of the country’s biggest corporates.
The fiscal impact of the UP farm loan waiver will, of course, be significant. UP’s already unsustainable fiscal deficit will further worsen. According to some estimates, this stands at 4.45% of the gross state domestic product (GSDP), presumably including servicing of UDAY bonds (for liquidating state electricity utility debts). This is significantly higher than average level of fiscal deficit for all states at 2.5% of GSDP. The farm loan waiver represents 13% of total revenue expenditure in 2016-17 and will push up the total revenue expenditure to more than 75% of total expenditure, leaving hardly any room for undertaking much-needed capital expenditures. Whichever way one may slice and dice the financial package required to finance the waiver, there is no escaping the fact that UP’s present revenues cannot afford it.
Having announced the waiver, Yogi Adityanath’s government will have to find the financial and fiscal means to implement it. Thankfully, unlike PC’s waiver in 2008, the UP cabinet has clarified that it does not expect commercial banks to take on any haircut on this account. The entire amount will be carried on the government’s balance-sheet. This may not be easy given that UP’s high fiscal deficit and debt-GSDP ratio of above 30%. Raising bonds from the market or guaranteeing some state utilities or public sector enterprise may just not be viable because there are unlikely to be any takers for these bonds, given UP’s rather fraught fiscal situation. The government could announce a slew of measures to improve fiscal discipline and plug leakages, but that may not suffice to generate sufficient resources to service the debt that it will have to raise to finance the waiver. Agencies like the LIC or GIC could be directed come to UP’s aid. This, however, has the huge risk of encouraging all other state governments to demand a similar treatment for themselves. Simply untenable.
Yogi Adityanath, with his ears close to the ground, must know that agriculture in UP (his state and mine) continues to wallow in low productivity and the great majority of UP farmers are caught in a pernicious low-income trap. This is despite the highly fertile lands of the Yamuna-Ganga plains. He clearly had this in mind when during his press conference while emphasising prime minister Narendra Modi’s call for doubling farmers’ incomes. Therefore, the chief minister has to find a way to both raise the necessary financial resources and also modernise UP’s backward agriculture sector, thereby raising crop yields and rural incomes.
To achieve his twin goals of mobilising the necessary funds for servicing the loan waiver and doubling farmers’ incomes, Yogi should approach the multilateral development banks like the ADB for a sector structural loan. The total loan itself will be in the eminently viable range of about $500 million, to be disbursed in successive tranches, upon implementation of agreed reform measures. These loans come at relatively concessional terms and for a long tenure of up to 10 years.
More important, such sector loans come with a detailed and time-bound plan for restructuring the sector and ensuring significant and sustained productivity gains. These generate economic growth and additional revenues for the government for it to successfully service the loan. Once finalised, this reform programme will help mobilise additional resources for improving rural infrastructure including public irrigation which needs urgent and critical attention. This will yield handsome returns, which will help service the loan.
This recourse to a sector structural loan from a MDB will not only avoid the fiscal stress, but more critically help UP develop a time bound and monitorable plan of action for putting it’s the economically critical agriculture sector on a sound techno-economic basis for sustained growth. I am sure that Yogi Adityanath will get the necessary support from the Centre for this bold and much-needed initiative that could trigger UP’s much awaited economic transformation. Using this measure to write off the stock of farmers’ debt would not only block future flow of bad agriculture debt. It would instead generate higher agriculture productivity and farmers’ incomes—indeed a prospect well worth pursuing.