Farm loan waivers a boon or bane? RBI paints bleak picture; it will leave you flummoxed

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Published: August 31, 2017 5:01:30 AM

Farm loan waivers by state governments posed a major fiscal risk over the medium term, the Reserve Bank of India (RBI) reiterated on Wednesday.

Farm loan waivers, loan waivers, RBI, Reserve Bank of India, state governmentsFarm loan waivers by state governments posed a major fiscal risk over the medium term, the Reserve Bank of India (RBI) reiterated on Wednesday. (Image: IE)

Farm loan waivers by state governments posed a major fiscal risk over the medium term, the Reserve Bank of India (RBI) reiterated on Wednesday. Listing out the challenges to state government finances in 2017-18, it said these loan waivers could impact credit discipline, vitiate credit culture and disincentivise borrowers from repayment.  Also, “they may have a destabilising impact on yields of state development loans, thereby posing a higher interest burden for the states in future. Concomitantly, ratchet effects can firm up the general level of interest rates and crowd out private borrowers”.
Denouncing farm loan waivers announced by five states, RBI governor Urjit Patel had expressed similar sentiments in the past.

According to the Economic Survey 2016-17 (Volume 2), the burden of farm loan waivers could be as much as `2.2-2.7 lakh crore if all states start offering the relief and would stoke short-term deflationary shock in the economy. The survey estimates that loan waivers by all states could reduce aggregate demand by as much as 0.7% of GDP. This is because the states funding the loan waiver would have to prune spending and possibly raise taxes to improve revenue and stick to their fiscal deficit limits, although private demands tends to get a boost from the loan waivers.  “Even as the central government makes significant efforts toward fiscal consolidation, the higher debt burden of the states could push up general government debt.

Keeping in view the recommendation of the FRBM Review Committee that a sustainable debt path — consisting of a debt-GDP ratio of 40% for the central government and 20% for state governments by 2022-23 — must be the principal macro-economic anchor of fiscal policy, the states too will need to tread the fiscal path with caution to reach this benchmark,” the RBI said in its annual report 2016-17. Uttar Pradesh, Karnataka, Maharashtra, Punjab and Tamil Nadu have announced waivers of loans taken by farmers and many others seem to follow suit. Even if only the five states that have made the announcements so far were to implement the loan waivers, the estimated fiscal impact could be `1-1.25 lakh crore, according to the economic survey.

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