Madras High Court has directed the government recently to extend the farm loan waiver to all the farmers irrespective of their extent of landholding.
The UP government also recently announced farm-loan waiver.
What are the negatives of waiver?
It undermines an honest credit culture.
Loan waivers will affect state government finances by increasing the deficit and worsening the quality of expenditure. Overall government borrowing goes up.
Factors include rise in wage bill and under-provisioning of interest payment for Ujwal DISCOM Assurance Yojana (UDAY) bonds etc. Farm-loan waivers will further increase the risk of slippage.
The possibility of implementation of loan waivers in other states will have a bearing on the national balance sheet.
State governments at the aggregate level account for about 60% of total government expenditure.
So maintaining fiscal discipline and quality of spending at the state level is becoming increasingly important.
Even though the fiscal onus of loan waivers will be on states, it affects the Central government as the chances of a credit-rating upgrade will diminish.
Yields on government bonds also are impacted.
It it can also lead to the crowding out of private borrowers as higher government borrowing can lead to an increase in cost of borrowing for others.
A consensus should be created so that loan-waiver promises are avoided, as sub-sovereign fiscal challenges can affect the national balance sheet.
