In his Budget speech just three months ago, Maharashtra Finance Minister Sudhir Mungantiwar said while he was aware of the deep indebtedness of farmers in the state, a loan waiver would be an ill-advised step as it would have an impact on investment in the agriculture sector and would provide no assurance that the farmer would permanently come out of the debt trap. However, an 11-day farmer strike finally broke the government’s resolve, and the state has announced a sweeping Rs 30,500-crore debt waiver to small and marginal farmers with immediate effect. Reports suggest that the government has also agreed to waive penalty and interest on power dues. While a ministerial panel will take a final decision in this regard, there is a possibility that the loan waiver could include richer farmers as well. Maharashtra has Rs 1.2 lakh crore of farm loans.
Such a massive loan waiver has implications not just for the credit culture but also on the finances of the state government. Before the waiver announcement, Maharashtra had possibly the lowest fiscal deficit as a percentage of the gross state domestic product. After the waiver, according to one estimate by India Ratings, the state’s fiscal deficit in 2017-18 will go up from 1.53 per cent (Budget estimate) to 2.71 per cent of the GSDP. The most obvious fallout of this extra spending is likely to be a cut in capital expenditure. Maharashtra’s state finances are not the only casualty. Banks are less likely to grant more loans to farmers, who, in turn, will have to seek out the usurious local moneylender the next time they need to borrow.
To a great extent, the Maharashtra loan waiver is itself a result of the Bharatiya Janata Party (BJP) government in Uttar Pradesh deciding to waive farm loans worth Rs 36,000 crore. The same day, the Madras High Court asked the Tamil Nadu government to waive crop loans to all farmers. These have opened a Pandora’s Box; similar demands have already been made in states such as Punjab, Tamil Nadu and Karnataka following widespread rural unrest in the country. BJP-ruled states such as Madhya Pradesh, Rajasthan and Haryana might also have to face demands for farm loan waivers. According to a Bank of America Merrill Lynch Global Research estimate, if such a populist trend endures then loans worth $40 billion, or Rs 2.6 lakh crore, could be waived by different states before the next general elections in 2019.
One view is to look at the consumption boost this will provide the economy. But funding such waivers will come at the cost of higher state government borrowings and overall inflation. The Reserve Bank of India has repeatedly expressed its disapproval for such waivers for two reasons: one, as its Governor Urjit Patel said the other day, such waivers “engender moral hazard”; and two, high government borrowing tends to impose an increasing cost of borrowing for others. The numbers on state finances are already of deep concern: for the first time in 11 years, the combined fiscal deficit of India’s 29 states as a proportion of the size of their economies in 2015-16 breached the 3 per cent threshold recommended as a fiscally prudent limit by successive Finance Commissions. Farm loan waivers will only deepen the crisis.