Rahul Gandhi-led Congress party has been quick to announce farm loan waivers in the three states it just captured in the recent assembly elections — Rajasthan, Madhya Pradesh and Chhattisgarh. However, it might be a bad idea, since farm loan waivers typically end up eating into the states’ capital expenditure budgets; statistics from some of these states prove this.

This had been a case in FY18 when Maharashtra, Rajasthan and Karnataka had announced farm debt waivers outside the budget, India Ratings said in a recent research note. Rajasthan and Karnataka had to reduce their CapEx by 12% and 2.5%, respectively, following a setback in revenue receipt. Even after that, they couldn’t bring down the fiscal deficit to the budgeted level.

The state government’s capital expenditure is indispensable as it is a major driver of the growth investment, the report said. The states capital expenditure has been higher than the central capital expenditure. It is expected that it will be higher by as much as 37.5% for states in the current FY19.

The ongoing of farm loan waivers will drastically impact the combined state government capital expenditure spending, India Ratings said in the note. “If the states will go on with their idea of loan waiving, need for fiscal adjustment is bound to arise and CapEx will become a soft target for deficit control,” it said.

Now, before the 2019 elections, Narendra Modi’s BJP is under great pressure to pass the nationwide farm loan waiver scheme.

Why state CapEx matters

The role played by the state government in capital expenditure is more crucial than is generally perceived as it achieves sustainable growth, the report said. Hence, a thorough review by policymakers is a must before budgets are decided for both the state and the central government.

Usually, CapEx is broadly spent towards public health, sanitation and water supply, urban development, agriculture & allied services, power sector, major and medium irrigation and flood control, and roads and bridges. Since Housing, roads and urban development help in distributing the benefits of economic growth to a wider section of society, the report says that the govt has been trying to focus more on these.

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The state governments’ aggregate CapEx in housing, roads and urban development grew at a CAGR of 20.5%, 25.6% and 19.4%, respectively, during FY01-FY17BE; meanwhile, the central government’s CapEx increased at a lower CAGR of 5.8%, 14.5% and 12.9%, respectively, as per the findings of the IND- RA report.

The newly elected Congress has already waived off loans of three states — Madhya Pradesh, Chhattisgarh and Rajasthan. “The competitive politics of farm loan waiver is killing the banking industry. It provides incentives to people to default. It’s a wrong way to address the real issue,” said United Bank of India Managing Director Ashok Kumar Pradhan as reported by Economic Times. If the farmer credibility with banks falls, they will become a victim of money lenders.

While tackling agrarian distress must be a priority for the ruling party, it must not come at a cost of sanity. It is expected that the higher allocation of the budget will be towards the farmers as the BJP faced a setback in the 3 states. The last national loan waiver which cost Rs 52,000 crore, was announced in 2008.

By Prachi Gupta