WAIVER OF FARM LOAN IS A BURDEN ON ECONOMY

BE/RBI NOTE/25/2018  

It is well known that a number of states have waived off farm loans after the 2014 General Elections in 2014.  The grey areas here as per RBI report are:

1. The burden on farmers and their families have obviously reduced
2. But the benefits to the overall economy through higher investments in agriculture and improved productivity, has not shown any positive effect.
3. Farm productivity enhancement through pecuniary incentives like debt waivers is unproven and the higher fiscal deficits in future may not be offset by higher GDP gains

Effect of Loan Waiver:

• Farm loan waivers have become the fulcrum point of discussion on policy making circles. We also observe that almost all States are going for the populist measure to attract their voters.
• Banks have been spared of the burden of writing off of loans but the burden has fallen on state Governments who have to fund the liabilities through market borrowings.
• It is seen that the total debt waiver granted during FY18 amounted to 0.32% of India’s GDP as per revised estimates.  The total debt waivers are budgeted at 0.2%of GDP in FY19.

• Also, the FY19 budget estimates read that the states have allocated between 0.1% to 0.8% of the respective state domestic product to loan waivers, which ranges between 2.0% to 2.98% of their budgeted gross fiscal deficit.
• The stress on States is because of the waiver of Farm Loans since 2014.
• Though the farmers benefit from the waivers, it becomes a challenge for policy makers as it could fuel inflation.

Concerns:

1. If the waivers are not targeted efficiently in addition to the productivity issues, the possibility of these waivers contributing to inflationary pressures via higher fiscal deficits is a great concern adds the report.
2. Farm productivity enhancement through pecuniary incentives like debt waivers is not justified the report further adds.
3. The use of 68% of available financial resources, in the form of gross domestic households’ financial savings of the gross GDP in FY 17 has been used to fund the deficits.
4. External debt sustainability has emerged as a corporate sector risk in view of the recent appreciation of the US dollar and US dollar funding gaps.