Uttar Pradesh elections 2017: PM Narendra Modi’s promise on loan waiver may imperil the state’s fiscal path

By: and |
New Delhi/lucknow | Updated: March 15, 2017 12:22:33 PM

A full waiver of Uttar Pradesh farmers’ unpaid dues to commercial and cooperative banks, as promised by the BJP, might cost the state’s exchequer about Rs 8,500 crore or roughly 0.67% of the gross state domestic product in 2016-17.

The loan waiver cost will overburden the state’s finances at a time it is staring at pay commission obligations too. (Reuters)

A full waiver of Uttar Pradesh farmers’ unpaid dues to commercial and cooperative banks, as promised by the BJP, might cost the state’s exchequer about Rs 8,500 crore or roughly 0.67% of the gross state domestic product (GSDP) in 2016-17. This assumes the state’s GSDP grows at close to national average in 2016-17 — it almost did last year — and that the year’s budget, being revised soon, will take the full hit.

Despite running revenue surpluses for the last few years, Uttar Pradesh, like most other states, has suffered huge fiscal slippages in the last couple of years, partly because of stepped-up capital spending. The loan waiver cost will overburden the state’s finances at a time it is staring at pay commission obligations too.

However, many analysts who FE spoke to said the waiver by the state would likely be restricted to overdue cooperative bank/primary cooperative societies’ loans, which, according to state government officials, is not more than 10% of the total impaired farm loans. Also, repayment by state governments in such cases, going by precedents, are usually staggered over three to five years.

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Addressing a poll rally at Hardoi in the state on February 15, Prime Minister Narendra Modi had said, “I will make sure that the first cabinet decision after forming the government in Lucknow will be to waive loans given to farmers in Uttar Pradesh.”

In fact, the BJP’s election manifesto for UP had promised not only crop loan waiver for all small and marginal farmers but fresh interest-free farm loans too. If the government bears the interest cost of new new loans, the burden on it would be even higher. “Crop loan disbursed to UP farmers during 2016-17 rabi season was R32,672 crore, more than 95% was by commercial banks and the balance by the cooperative banks. During the 2016 kharif period, fresh loans disbursed was to the tune of over R30,00 crore, with a sixth of it by cooperative banks,” a UP finance department official told FE.

Analysts felt that the waiver would be implemented without hurting the banks any further, as the burden could almost entirely lie with the central/state budgets. “The state government will have to provide the budget for farm loan waiver upfront… They have only the right to waive (farmers’) dues to state cooperative banks and primary agricultural cooperative societies,” Siraj Hussain, former secretary, department of agriculture and cooperation, told FE. Hussain said that although the Centre can waive farm loans provided by commercial banks, once this done for UP, it may come under pressure to provide similar largesse to farmers in Karnataka, Tamil Nadu and Kerala, which are facing drought-like conditions.

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The UP government’s fiscal deficit is estimated at close to Rs 50,000 crore or 2.97% of the GSDP in 2016-17 — had the leeway under UDAY scheme for power sector been not there, the deficit would have been 4.04%. The most populous state’s public debt is budgeted at 30.3% of GSDP in the current year. But the actual figures could turn out to be much higher, given that over 80% of the budgeted deficit has been exhausted by December-end. The increase in state bond yields and the likely lower-than-budgeted nominal GDP growth are additional risks to the budgeted deficit estimates. The UP government’s primary deficit, which as per the mandate under the Fiscal Responsibility and Budget Management Act, should be less than 1%, will turn out to be much worse too, threatening to cause an alarming increase in its debt-GDP ratio.

The BJP’s election manifesto for UP promised crop loan waiver for all small and marginal farmers and fresh interest-free farm loans, even as the NK Singh committee on fiscal consolidation set up by the Centre reportedly said that the consolidated debt-GDP ratio of the Centre and states must be reduced to 60% (which requires states’ debt to stabilise at 20%). Analysts have recently sounded alarm bells given the marked deterioration of states’ finances in recent years, while the Centre has more or less managed to consolidate its finances despite a stuttering economy demanding higher public spending. Stating that India’s “fiscal centre of gravity has rapidly moved from the Centre to states”, JPMorgan has warned that state debt “could get into an explosive path”.

Farm loan waivers have in recent tears become a regular feature in election manifestos of political parties. While such largesse by the state could be traced to VP Singh’s government’s Rs 10,000 crore agricultural debt relief scheme in early 1990s, the bounties culminated when the UPA government in the 2008-09 Budget unveiled full loan waiver for some 3 crore farmers along with a one-time settlement scheme, which together cost the exchequer Rs 60,000 crore. “Recent elections have raised some concerns on a possible rise in NPLs (non-performing loans) from agriculture sector of banks in (UP-Punjab) region. (These) are critical states given that the banks have ~10% of loans in these states and they are mostly in the agriculture sector with a reasonably high share of overdues between 3 and 10% across banks,” Kotak Institutional Equities wrote. It remains to be seen whether the government would want to waive only the interest on the loans or the principle amount or both and also whether it would set the waiver limit for individual farmers at Rs 50,000 or Rs 1 lakh.

Uttar Pradesh, the country’s largest producer of cane and wheat, depends heavily on agriculture, with the farm and allied sectors accounting for over 21% of its GDP in the last fiscal, compared with the national average of just over 14%.

Of 14 crore households in the country dependent on farming, 2.2 crore are in UP, about 90% of which is in the small and marginal category, holding up to 1 hectare of land. The net sown area in UP is estimated at 16.56 million hectares or 12% of the national sown area.

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