17/09/2019 - Agriculture | Mainstorming

IAS Parliament 5 years

KEY POINTS

· The report of an Internal Working Group (IWG) by RBI has shown how farm loan waivers dented state finances and urged governments both central and state to avoid resorting to farm loan waivers.

· Since 2014-15, many state governments have announced farm loan waivers. This was done for a variety of reasons including relieving distressed farmers struggling with lower incomes in the wake of repeated droughts and demonetisation.

The impact on state finances

· Between 2014-15 and 2018-19, the total farm loan waiver announced by different state governments was Rs 2.36 trillion. Of this, Rs 1.5 trillion has already been waived.

· The actual waivers peaked in 2017-18 in the wake of demonetisation and its adverse impact on farm incomes and amounted to almost 12 per cent of the states’ fiscal deficit.

· In essence, a farm loan waiver by the government implies that the government settles the private debt that a farmer owes to a bank.

· But doing so eats into the government’s resources, which, in turn, leads to one of following two things: either the concerned government’s fiscal deficit (or, in other words, total borrowing from the market) goes up or it has to cut down its expenditure.

· A higher fiscal deficit, even if it is at the state level, implies that the amount of money available for lending to private businesses both big and small will be lower.

· It also means the cost at which this money would be lent (or the interest rate) would be higher. If fresh credit is costly, there will be fewer new companies, and less job creation.

Impact on India’s macro-financial stability

· Cutting capital expenditure to achieve the target of Fiscal deficit as per FRBM act 2008.

· Increasing Non-performing assets, and worsening credit culture impact the disbursal of credits and affects economic growth trajectory.

· At the macro level, waivers lead to crowding-out of private investment as increase in government borrowings to fund waivers tends to increase cost of borrowing for private borrowers.

· Thus, higher fiscal deficits may not be offset by higher GDP gains and may eventually stoke inflation. In any case, a limited section of farmers get relief from waivers.