Uttar Pradesh, the first state to announce a farm loan waiver in the current series of such succour, spent Rs 20,598 crore in 2017-18 to relieve the state’s 34.11 lakh farmers of the onus of repaying their loans, but not without cutting its budget spending drastically from the targeted levels.
Uttar Pradesh, the first state to announce a farm loan waiver in the current series of such succour, spent Rs 20,598 crore in 2017-18 to relieve the state’s 34.11 lakh farmers of the onus of repaying their loans, but not without cutting its budget spending drastically from the targeted levels. The state’s overall budget expenditure in the last fiscal turned out to be Rs 2,91,592 crore, about 22% lower than the original estimate (BE) of Rs 3,71,504 crore; the capex component of the spending saw an even sharper reduction of 33% to Rs 38,647 crore.
Given that the trend of curbing development spending to meet the cost of loan waivers for farmers is likely to have been replicated by the other four states (Maharashtra, Karnataka, Punjab and Tamil Nadu) that made similar promises, the largesse might have have taken a toll on the economic growth already.
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Economic Survey 2016-17 had predicted that the spate of farm loan waivers could significantly reduce aggregate demand and impart a deflationary shock to the economy. According to the survey’s second volume released in August 2017 (UP announced the farm loan waiver in April 2017), even if only the above five states implemented the loan waivers as announced then, the estimated impact could be Rs 1-1.25 lakh crore. If all states followed the UP model — up to Rs 1 lakh for all small and marginal farmers — the survey had said, the aggregate demand would reduce by as much as 0.7% of gross domestic product (GDP).
UP spent 57% of the total farm loan waiver announced by the Yogi Adityanath government in 2017-18. Nudged by the Centre to remain on the fiscal consolidation path, the state met the fiscal deficit target of 3% of GDP in 2017-18. The state’s finances had come under strain after a few years of creditable fiscal consolidation as the UDAY scheme for power discoms pushed its fiscal deficit to 5.07% in 2015-16 and 4.49% in 2016-17 from 3.3% in 2014-15.
Maharashtra also announced a farm loan waiver up to `1.5 lakh per family in June last year at a cost of Rs 34,000 crore for the benefit of 89 lakh farmers. Less than half of the total size of the waiver was actually spent in 2017-18 while the state government is examining more applications for loan relief, which could materialise in FY19.
Indian states had achieved creditable fiscal consolidation till FY12 (when their combined deficit stood at 1.93% of GDP), but have since turned less prudent; the combined deficit widened to 2.69% in FY15 and the UDAY scheme worsened the fiscal deficit to 3.6% in FY16 and further, to 3.4% in FY17. The state governments’ combined fiscal deficit in FY18 may have been more than the estimated (BE) 2.69% of GDP; it might have even crossed the 3% threshold.