The Hindu Explains: From Smriti Mandhana to the Mysuru yoga hub

The lowdown on farm loan waivers

A scene after violent clashes between farmers and the police at Pipliya in Mandsaur district on Tuesday. At least five farmers were killed and four others injured in firing by police on farmers, who have been protesting for a week demanding loan waiver and fair price for their produce.

A scene after violent clashes between farmers and the police at Pipliya in Mandsaur district on Tuesday. At least five farmers were killed and four others injured in firing by police on farmers, who have been protesting for a week demanding loan waiver and fair price for their produce.  

What is it?

Farm loan waivers are not new to the Indian economy. In 2008-09, the UPA-I government announced a farm loan waiver of ₹60,000 crore (that was the initial estimate, which went up to over ₹70,000 crore later). It hit the exchequer, and not the banks, but it distorted the credit culture since it discouraged farmers from paying up their dues. In addition, when one State offered a waiver, it raised expectations in other States too. Since the BJP took office in May 2014, starting with Andhra Pradesh, several States have joined the farm loan waiver bandwagon, with Uttar Pradesh and Maharashtra being the most recent ones, despite Union Finance Minister Arun Jaitley’s stand that the States would have to foot the bill.

Mr. Jaitley had shown resolve to maintain fiscal discipline during his budget speech earlier this year, which was lauded by industry and investors. Hence, he told the States that the Centre would not pay for the waiver. On the other hand, the Reserve Bank of India (RBI) warned about the deteriorating fiscal position of the States. “We need to create consensus so that such loan waiver promises are eschewed. Otherwise, sub-sovereign fiscal challenges in this context could eventually affect the national balance sheet,” RBI Governor Urjit Patel said. He pointed out that if on account of loan waivers, the overall government borrowing went up, yields on government bonds would also be impacted. In a cascading effect, this would crowd out private borrowers as higher government borrowing could lead to an increase in the cost of borrowing for others.

How did it come about?

Two successive years of below normal rainfall, in FY14 and FY15, are being seen as the main reason for the loan waiver demand. But the recent farmers’ unrest in Madhya Pradesh took place despite a good monsoon that resulted in a bumper crop. However, the prices of farm produce came under pressure because of demonetisation as there were ‘fire sales’ of vegetables — a fact which was acknowledged by the RBI. The sharp decline in food prices in the consumer price index-based inflation was evident. Retail inflation dropped to 2.18% in May as the decline in the prices of food and beverages was sharper in May than April (-0.22% in May against 1.21% in April).

Why does it matter?

The loan waiver will have a significant impact on the States’ finances. According to a report by the State Bank of India, the impact on Punjab will be the maximum, with the State’s fiscal deficit jumping by an additional 4.8% of the GSDP. The report says that the States will make provisions for farm loan waiver in their budgets in multiple years. In its recent report on the States’ finances, the RBI also pointed to the worsening position of their financial health. It noted that the consolidated finance of the States had deteriorated in recent years, with the gross fiscal deficit to GDP ratio averaging 2.5% in the last five years (from 2011-12 to 2015-16), compared with 2.1% during the previous five-year period.

The RBI observed that the State governments faced severe resource constraints as their non-debt receipts were often insufficient for fulfilling their development obligations. There is one positive aspect of the current loan waiver schemes, as highlighted by some economists: the schemes announced in several States have emphasised that loans should be waived only up to a specified threshold limit (mostly ₹1 lakh), and any amount over that will have to be paid.

What next?

More such schemes will possibly follow as the States going to the polls have started upping the ante for a farm loan waiver. There are protests in several parts of Gujarat demanding a waiver. The State will go to the polls later this year.

Bankers have been concerned about this. As SBI Chairman Arundhati Bhattacharya put it: “In case of a farm loan waiver, there is always a fall in credit discipline because the people who get the waiver have expectations of future waivers. Future loans given often remain unpaid.”

 

A letter from the Editor


Dear reader,

We have been keeping you up-to-date with information on the developments in India and the world that have a bearing on our health and wellbeing, our lives and livelihoods, during these difficult times. To enable wide dissemination of news that is in public interest, we have increased the number of articles that can be read free, and extended free trial periods. However, we have a request for those who can afford to subscribe: please do. As we fight disinformation and misinformation, and keep apace with the happenings, we need to commit greater resources to news gathering operations. We promise to deliver quality journalism that stays away from vested interest and political propaganda.

Support Quality Journalism
Related Topics
This article is closed for comments.
Please Email the Editor

Printable version | May 27, 2020 8:03:55 PM | https://www.thehindu.com/news/national/other-states/the-lowdown-on-farm-loan-waivers/article19241176.ece

Next Story