Punjab, which became the latest State to announce a farm loan waiver scheme on Monday, is most vulnerable to a fiscal shock from such debt write-offs along with three other States, while Uttar Pradesh could also overshoot its fiscal deficit goals on the same account, a research report by JM Financial said. While Andhra Pradesh and Telangana had announced farm loan waivers in 2014, Tamil Nadu, Uttar Pradesh and Maharashtra have followed in their footsteps recently. Madhya Pradesh, where farmer protests took a violent turn recently, has resisted a blanket waiver for now, but promised a special zero-interest loan arrangement for defaulters of existing farm loans instead.
“Assuming all States announce the farm loan waiver with a staggered timelines (like AP and Telangana did by releasing funds over 4-5 years to curtail impact on their fiscal deficit), we find that Tamil Nadu, Punjab, Rajasthan and Kerala will be worst hit. States like UP and MP too, are expected to exceed their budgeted fiscal deficit as their additional fiscal space is inadequate to fully absorb the burden,” JM Financial analysts noted in the report titled ‘State-wise Sensitivity to Farm Loan Waiver.’
Gujarat, Maharashtra and, to an extent, Karnataka, however, could cope with the strain of such a debt write-off scheme, as per the report, but this would depend on the extent of the loan waiver scheme’s coverage.
On an aggregate basis, it estimates that the gross fiscal deficit of 17 States could go up by 60 to 90 basis points as a percentage of gross state domestic product and push States’ deficit beyond the 3% limit envisaged under the Fiscal Responsibility and Budget Management framework for 2017-18.
