Loan waivers to farmers will worsen fiscal deficit of state govts: Icra

The state governments ruled by the Bharatiya Janata Party and the Congress seem to be in a race to announce farmer debt waivers.


So far, Uttar Pradesh and Maharashtra (ruled by BJP) and Punjab and Karnataka (ruled by Congress) have announced debt waivers.


Union finance minister Arun Jaitley had categorically stated that all such schemes have to be funded by the state governments, keeping in mind the Centre's fiscal deficit target of 3.2 per cent of GDP for the current financial year.


According to a report by ratings agency Icra, funding of crop loan waivers would likely worsen the fiscal deficit and leverage levels of state governments. There is a significant risk that productive capital spending may end up being used to fund a portion of the loan waivers, impacting the growth of overall investment activity in the country, the report suggested.

  Cost to the Exchequer Eligibility Number of farmers to benefit
Uttar Pradesh Rs 36,359 crore Those with debt up to Rs one lakh. Those who took loan before 31st March 2016 around 8.6 million small and medium farmers
Maharashtra Rs 35,000 crore Loan up to one lakh, provided those were taken up to June 30, 2016 3.1 million farmers
Punjab Rs 10,000 crore Small and marginal farmers (owning up to five acres of land) with loans up to Rs 2 lakh along with flat Rs 2 lakh relief for other marginal farmers irrespective of their loan amount 1.02 million farmers
Karnataka Rs 8,165 crore Short-term loan up to Rs 50,000 outstanding as on June 20, 2017 from cooperative banks 2.2 million farmers


"Moreover, debt waivers are likely to necessitate further debt raising by the state governments, which would increase the yields at which state development loans (SDL) are raised, widen the spread relative to Central Government securities (G-sec) and also contribute to crowding out the private sector from accessing the bond markets at competitive rates," it said.


Even without factoring in the amount needed to fund the crop loan waivers that some states have announced, Icra estimated the gross state development loans issued by the state governments to rise from Rs. 3.8 lakh crore in FY17 to Rs. 4.5 lakh crore in FY18.

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