Such largesses till 2019 polls seen at Rs 2.8 lakh crore, pose a threat to fiscal and credit discipline.
Immediately after taking oath of office on Monday, Madhya Pradesh chief minister Kamal Nath cleared the proposal of waiving farm loans up to Rs 2 lakh as promised by Congress president Rahul Gandhi ahead of assembly polls. While no official estimate was immediately available on how much the largesse would cost the state exchequer, a source from the state agriculture department told FE that the cost could be between `35,000-`38,000 crore. Over 34 lakh farmers would benefit from the scheme, he added.
MP’s is the latest in a series of such waivers announced by state governments that began with Uttar Pradesh’s decision to waive farm loans worth Rs 36,359 crore in April, 2017.
The trend, denounced by analysts not just for fiscal imprudence but for its potential to impair credit discipline, is posing a serious threat to the states’ fiscal consolidation.
Rajasthan, where too a new Congress government assumed office on Monday, is expected to make a similar gesture soon. Merrill Lynch Global Research has estimated that loan waivers by the 2019 general elections could be of the order of 2.75 lakh crore.
Former chief economic adviser Arvind Subramanian said on Monday: “It (farm loan waiver) penalises those who don’t borrow from the formal financial sector. It also penalises those who repay their loans on time. It’s an inefficient instrument to address agrarian objectives.” Experts have long argued that the distress in the farm sector could be best addressed with steps that could ensure remunerative prices for farm produce, like unshackling the marketing of agriculture items from the monopolistic APMC mandis dominated by intermediaries.
Ashok Gulati, former chairman of the Commission for Agricultural Costs & Prices (CACP), wrote recently: “Congress learnt this trick from prime minister Narendra Modi when he promised to waive loans in Uttar Pradesh, and won the election. This will be now repeated in all major states. It is just a temporary relief for farmers, not a solution to their problems. Alas, neither BJP carried out any structural reforms in agri-marketing, nor Congress is likely to do.”
After Nath signed the relevant file, Rajesh Rajora, principal secretary, Farmers’ Welfare and Agriculture Development Department, issued an order that stated: “Madhya Pradesh Government has taken a decision to write off short term crop loan of eligible farmers up to the limit of Rs two lakh, as on March 31, 2018, from nationalised and cooperative banks.” Income-tax payees and government employees won’t be eligible for the succour. In 2018-19, MP’s fiscal deficit is estimated to be Rs 26,780 crore, which is 3.2% of the gross state domestic product. This estimate is higher than the 3% limit prescribed by the 14th Finance Commission. The Commission said the limit might be relaxed to a maximum of 3.5%, if states are able to contain their debt (0.25% leeway) and interest payments (0.25% relaxation) to certain specified levels. However, MP’s debt-GSDP ratio is over 27% as against below-25% stipulated by the commission for the fiscal leeway.
While the budget estimates unveiled by the states for FY19 indicate a consolidated gross fiscal deficit of 2.6% of GDP, the RBI in a recent report cautioned that “visible fiscal pressures are emerging for several states on the expenditure side” and pinned hopes on the stablisation of the GST “that should boost states’ revenue capacity and support the resumption of fiscal consolidation.” The pressures referred to are announcement of farm loan waivers and 7th Pay panel-induced salary/allowance hikes for state governments’ staff.
SBI Research said in a recent report: “The states of Maharashtra, Uttar Pradesh, Punjab, Rajasthan and Karnataka have already announced the loan waiver to the tune of Rs 1.2 lakh crores since 2017, the implementation of which is still under way. Rajasthan has already undergone polls. Among the states which are due for election next year, Andhra Pradesh, Haryana and Odisha have a fair share of agri credit. Even if these states individually announce debt relief to the tune of 18% of their portfolio the combined debt waiver for these and the previously announced ones, put together, would be around Rs 2 lakh crores (additional Rs 70,000 crores loan waiver by May 2019, a frightening proposition for Indian banks).”
(With PTI inputs)