By Upasana Hembram
The UP government’s populist decision to waive off farm loans triggered a host of problems with several state governments being pressured into waiving off farm loans. The frustration of farmers with the Centre’s agricultural market policies is what has led them to the streets protesting, instead of celebrating a record output after two successive droughts.
While the primary demand common to these farmer agitations was loan waivers, they are also urging for several other demands which include implementation of the Swaminathan Commission report, higher support prices for their produce and placing a cap on the import of farm produce.
States and the Centre intertwined in a financial quandary
As more and more states jump on the loan waiver bandwagon, it suggests grave implications on fiscal deficit of states as well as debt on public exchequer. With impending Pay Commission costs, the roadmap for fiscal consolidation is set on a trajectory bound to go berserk. The enhanced borrowing window granted by the Finance Commission might further tempt states to continue spending extravagantly. In 2015-16, states breached the FRBM mandate of 3% fiscal deficit and ended up at a much worse figure of 3.6% and 3.4% in 2016-17 after slipping up in their tax revenues.
The Centre guarantees debts incurred by states by taking the burden of the largest debt amount off of the state government. Even if states decide to issue off-budget bonds, while fiscal deficit numbers will not surge dramatically in the current year, the escalating interest liabilities with deteriorating debt to Gross State Domestic Product (GSDP) ratios would invite scepticism on credibility.
Major changes required to prevent potential economic slumps
With rising expectations of state governments waiving off their loans, farmers have already stopped repaying money owed to financial institutions to the extent that they have emptied their bank accounts in order to avoid deduction of payment. Though loan waivers help clean up banks’ balance sheets in terms of defaulters, it piles up on the already existing mount of bad corporate debt contributing further to the adversities of banks, not to mention the cost of an increasing risk of moral hazard that’ll corrupt overall culture of credit discipline.
Low prices and bad loans are just manifestations of structural failures of the government’s anti-market policies. Not only are they a burden on the public exchequer, but they might also deprive the agriculture sector of much needed infrastructure. States should not be allowed to violate the FRBM mandate without any impunity. Loan waivers shall be allowed on a case-by-case basis with an additional constraint of being within the FRBM ceiling. States announcing debt waivers should be obliged to report these numbers in the fiscal deficit rather than placing them off budget. Farmers everywhere have been demanding implementation of recommendations by the Swaminathan Commission. In order to prevent farmer agitations in the future, the Centre must seriously consider these recommendations and implement structural changes to incorporate the same.
Featured image source: Livemint
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