By Priyanka Venkat
The RBI staff recently released a paper that stated that in the event that the combined fiscal deficit for 2017-18 owing to farm loan waivers goes up by 40 bps, it could lead to a 20 bps permanent increase in inflation from 2017-18 onwards. The paper also said that the amount of farm loan waivers in 7 states (including UP and Maharashtra) is likely to be close to Rs. 881 billion which is 0.5% of GDP. Farm loan waivers have been announced by states even though state finances are dwindling. Uttar Pradesh announced a massive loan waiver of Rs. 36,000 crore despite the fact that the state has seen a formidable increase in fiscal deficit from Rs. 3,070 crore in FY 1991 to Rs, 64,320 crore in FY 2016. Maharashtra too announced a loan waiver plan amounting to Rs. 34,000 crore despite already holding public debt that will exceed 4 lakh crore by March 2018.
Increasing burden for the economy
The implications of the loan waivers are multifold. State governments have two options when it comes to financing such waivers and the resulting deficit. One is to reduce expenditure and the other is to increase borrowings. Both are likely to have adverse impacts. Reducing capital expenditure could force states to forego benefits accruing from investments in crucial areas such as infrastructure. Increase in government borrowings would increase interest rates that crowd out private borrowers. The higher interest rates stop private borrowers from taking loans, which leads to a reduction in investment, ultimately stalling growth. The impact isnt limited to just the state exchequer. While the central government has made it clear that it will not support such waivers, combined finances of the state are a part of general government deficits and debt. The large fiscal deficits of states would slow down the reduction in government debt as a whole (central and state debt included). This has further implications on the sovereign credit rating of India, with government debt being above the ‘BBB’ median of 40.9 per cent and the fiscal deficit of 6.6 per cent of GDP in FY17 much higher than the ‘BBB’ median of 2.7 per cent, according to Fitch Ratings. This makes rating agencies apprehensive about giving India a higher position in the Investment Grade Status.
The RBI governor, Mr. Urjit Patel warned of dangerous outcomes such as inflation that can arise from states not meeting its fiscal targets as a result of the waivers. While the Centre has maintained its fiscal deficit at 3.5% of the GDP, the large state deficits could push the combined fiscal deficit to 7% or higher, surpassing the budgeted combined fiscal deficit of 5.9%. To break this down, a high fiscal deficit in the country could result in the printing of more currency to repay debt. This consequently results in an increase in the supply of money, pushing prices up and creating an inflationary situation.
Necessity v/s sufficiency
Proponents of the loan waiver argue that it is necessary to provide relief to farmers burdened by debt. The inability of farmers to repay agricultural loans is largely due to the harsh forces of nature and poor agricultural policies that fail to insulate them from such forces. After 1967, policies were formulated around the objective of ensuring enough produce so that they were cheaper for the consumer. While this benefitted the consumer, farmers were drastically affected, creating the domino effect we see now. While these loan waivers are necessary to mitigate the harms done to debt ridden farmers, it is far from being a sufficient measure. In addition to costing the government large amounts of money that could be used for agricultural research and technologies to help farmers, loan waivers have also attracted criticism for eroding credit discipline. It encourages farmers to default on loans, even if they can pay it. This makes banks hesitant to lend in the future, harming the farmers that require the money, who now have to go to private moneylenders, who charge exorbitant interest rates.
Good for votes…bad for the economy ?
Historically, such waivers have been used as political tools to gain traction, with no efforts being taken to fix the actual problem. The adverse economic consequences highlighted above pushes for immediacy in finding a permanent solution. Successive steps need to be taken to fix current agricultural policies and increase the income of farmers. Harmful import and export policies, poor regulation of markets, overproduction, are issues (amongst others) that require closer scrutiny. To ensure income for the farmers, various solutions such as MSP and crop insurance schemes have been suggested. Cooperatives (similar to the structure implemented by Amul) and contract farming are viable solutions to the farming crisis. A dynamic shift is needed in the approach used to deal with agricultural problems in the country. The focus should be more on making the agricultural sector self-reliant, rather than repeatedly employing damage control tactics resulting from poorly thought out policies.While it might be appealing to believe that loan waivers are the solution, it is imperative that there be a deeper understanding and analysis of the agrarian crisis in order to ensure that we dont stop here. The farmers not only need to be unburdened by debt but also need to be unburdened by the system that coerces them to take on debt.
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