Even as the Opposition in the State legislature has been clamouring for waiver of farm loans, the Reserve Bank of India (RBI) has cautioned Karnataka and other States against “jumping onto the farm-loan waiver bandwagon, by observing that loan waivers impact credit discipline and vitiates credit culture”.
It stated that loan waivers disincentivise borrowers from repayment, leading to moral hazard with expectations of future bailouts.
In its 363-page report State Finances: A Study of Budgets of 2016-17 released last month, the central bank states that ad hoc initiatives of farm loan waiver could add to the States’ fiscal burden and affect their finances over medium term.
In Karnataka, farmers have borrowed ₹10,000 crore from cooperative societies as against over ₹35,000 crore from nationalised banks. During the debate on State budget in the legislature session, the BJP and JD(S) have been demanding loan waiver as farmers had suffered crop loss owing to severe drought in 160 taluks.
The RBI said loan waiver could alleviate the immediate debt burden of financially distressed farmers. “But, it is essentially a transfer from tax payers to borrowers with an adverse bearing on the fiscal viability of States,” the report observed. It cautions about the increase in future liabilities of States if they jump onto the “bandwagon”.
It noted that the Centre’s efforts to carry forward fiscal consolidation could be squandered unless State finances were strengthened. As of now, the budgeted consolidated Gross Fiscal Deficit (GFD)–Gross State Domestic Product (GSDP) ratio of 25 States at 2.6% for 2017-18 is lower than the Centre’s GFD-GDP ratio of 3.2%.
However, “there are several downside risks like implementation of recommendations of States’ own pay commissions, farm loan waiver in some States, and revenue uncertainty on account of the implementation of GST,” the RBI report said.
Finance Minister Arun Jaitley too has already ruled out the Centre’s financial support to farm loan waiver schemes announced by States. He said that the States would have to meet the cost out of their own resources if they opt for such initiatives.
The Maharashtra government announced farm loan waiver, expected to cost about ₹35,000 crore, even as farmers from Karnataka and Madhya Pradesh are demanding the same.
Chief Minister Siddaramaiah has said that his government is ready to waive crop loans if the Centre scraps loans taken from nationalised banks. His contention is that only 20%-22% farmers would benefit if the State alone waives loans.
Nearly 80% of farmers, who have taken loans from nationalised banks, would be then left in the lurch, he argued.
