Congress wins elections, stares at task of scrapping farm loans in 3 states

With the opposition Congress hoping to form the government in Rajasthan, Chhattisgarh and also in Madhya Pradesh, it will in all probability face a fiscal nightmare in fulfilling its promises of farm loan waivers and other other doles including a blanket employment allowance to all unemployed youths.  

As Congress President Rahul Gandhi has promised to waive loans of farmers in Rajasthan, Madhya Pradesh (MP), and Chhattisgarh within 10 days if the party was voted to power, a back of the envelop calculation shows that the respective new governments will have to spend much more than Rs 220 billion in Rajasthan, more than Rs 160 billion in MP, and nearly Rs 30 billion in Chhattisgarh to keep the promise.

This will put enormous pressure on the near-precarious fiscal situation in two of the three states: Rajasthan and MP.

To waive crop loans up to Rs 100,000 per indebted farmer, Rajasthan will need to spend Rs 219 billion from its fiscal kitty, a September 2017 Reserve Bank of India (RBI) study had estimated.  

If the new government decides to extend the per farmer benefit up to Rs 150,000 or Rs 200,000 — similar to Karnataka, which went ahead with the latter — the fiscal burden will be substantially more than the RBI estimate, experts surmise.

Similarly, the amount to be spent in MP will also escalate. The burden in Chhattisgarh will be relatively safer to handle for the new government.

A look at the latest data reveals the fiscal situation of Rajasthan and MP is fragile, in comparison to Maharashtra and Karnataka, which have implemented similar waivers.  

While Rajasthan expects a big improvement in its fiscal deficit, from 3.5 per cent of its gross state domestic product in 2017-18 to 3 per cent in 2018-19 (FY19), the state is prone to fiscal slippages due to higher interest burden in the medium term since it took state electricity distribution company debt on its books, under the Ujwal Discoms Assurance Yojana (UDAY).

The annual spending on agriculture and allied activities in Rajasthan is about Rs 82 billion, much lower than the loan waiver outgo. Its capital expenditure, budgeted at Rs 257 billion in FY19, too will suffer, slowing down the construction of roads, bridges, and irrigation.

MP expects its fiscal deficit to soften marginally, from 3.4 per cent to 3.3 per cent. Despite no loan waiver implemented by Shivraj Singh Chouhan in the state, the state government has spent heavily in the last two years on procurement of wheat, soybean, and pulses under the Bhavantar Bhugtan Yojana (BBY).

After UDAY and BBY, the two states will probably need to curtail their expenditure in key areas which need funds, experts said.

“Though the waiver will be staggered over three to four years, a more important question will be the set-off that it will create. The investments in agriculture will suffer as a result since the same money will now be channelised for loan waivers,” Ashok Gulati, agricultural economist at Indian Council for Research on International Economic Relations, said. 

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