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New Delhi, June 10: Maharashtra chief minister Devendra Fadnavis on June 6 announced the state’s biggest farm loan waiver, after giving in to the ongoing Maharashtra farmers’ protests demanding loan relief, which will not only prove fruitless for the protesting farmers serving no solution to their agitation but will also impact the Indian economy in the long run. Loan waivers do make political sense in short run – farmers’ votes in elections – but it will hardly have any long term impact on agriculture and farmers seeking loan relief. It might provide relief for this season, but the farmers would again be back at this position next season.
Uttar Pradesh chief minister Yogi Adityanath announced farm loan waiver as part of his poll promise and once again, how it will impact the agricultural and Indian economy has come to the fore. The Budget 2017-18 was based on 10 themes and one of them was doubling farmers’ income in next five years through the transformation of Indian agriculture but till now, the government has been focussing on farm loan waivers. Yogi Adityanath announced farm loan waiver which prompted farmers in other states such as Maharashtra, Haryana, Madhya Pradesh to demand a loan waiver.
Punjab chief minister Amarinder Singh had also met Prime Minister Narendra Modi and Arun Jaitley seeking assistance on farm loan waiver for the farmers in the state. Within a few days of Maharashtra farmers announcing indefinite strike and that they will not let any produce to be transported to the APMC markets, Madhya Pradesh farmers also demanded such relief from MP government.
Ratings firm India Ratings had also predicted that the crop loan waiver worth Rs 30000 crore announced by the Maharashtra government “will be at the cost of capital expenditure and also push up the fiscal deficit”. Let’s take a look at how it will drag the Indian economy backward while the Narendra Modi-led government tries to fulfill their poll promises of bringing it forward and increasing farmers’ income by 2022.
India Ratings stated that the loan waiver for small and marginal farmers will push up Maharashtra’s fiscal deficit to 2.71% (budgeted: 1.53%) in the financial year 2018 of gross state domestic product (GSDP). The India Ratings estimated that the debt will rise to 17.44% against the budgeted 16.26%. If Maharashtra government repays the loan taken by the farmers, this will impact the government’s finances, thus increasing its fiscal deficit (the difference between the total revenue and expenditure of the government). If loan waiver is implemented, it will reduce the fiscal space for Maharashtra government to tackle higher capital expenditure. (Also Read: Maharashtra farmer’s suicide note says ‘don’t cremate my body until CM Devendra Fadnavis visits’)
If the government pays off the loans taken by the farmers, the government expenditure on development of the state in long run will be affected. This will have an impact on the progress and infrastructural development of the state. Economists of State Bank of India had estimated that loan waivers by the Uttar Pradesh government will cost about Rs 27,420 crore, or about 8% of the state’s revenue.
Since the time Yogi Adityanath announced poll promise of loan waiver to the Uttar Pradesh farmers, many other states came forward holding protests demanding a loan waiver from their respective governments. This will increase the burden on the governments when they pay on behalf on the farmers and will thus, affect the progress of the states.
Even though agriculture contributes 15% to the nation’s gross domestic product, a majority of the population depends on agricultural produce to survive. While the farm loan waivers do make sense in the politics but not in long run. As Arundhati Bhattacharya said that loan waivers will affect credit discipline. Her words were echoed by Reserve Bank of India governor Urjit Patel when he warned against the farm loan waivers saying that such waivers undermine honest credit culture, impact credit discipline.
“It impacts credit discipline…In other words, waivers engender moral hazard. It also entails, at the end of the day, transfers from taxpayers to borrowers, said Urijit Patel. Urijit Patel also said that farm loan waivers would result in overall and state government borrowing more, which will lead to the crowding out of private borrowers as it will result in an increase in the cost of borrowing for others.
Xavier Gine and Martin Kanz of the World Bank in their study — The Economic Effects Of A Borrower Bailout: Evidence From An Emerging Market — said that loan waivers can affect agricultural output in the medium to long run as banks may get more selective in extending credit. “…we find no evidence of greater investment, consumption or positive labor market outcomes in areas where debt relief led to a significant reduction of household debt. It is not surprising that, in the case of India, government efforts to stimulate the real economy through debt relief were largely in vain given that the bailout also led lenders to reallocate credit away from districts with high program exposure.”
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