Impact Of Farm Loan Waiver – Free PDF Download

ABOUT THE INTERNAL WORKING GROUP

• An internal working group led by M K Jain was formed by RBI in February 2019.
• It submitted its report in September 2019.
• Its mandate was to provide recommendations on agricultural credit, especially the impact of farm loan waivers on state finances.

BACKGROUND

• Since 2014-15, many state governments have announced farm loan waivers.
• This was done for a variety of reasons including relieving distressed farmers struggling with lower incomes in the wake of repeated droughts and demonetisation.
• Also crucial in this regard was the timing of elections.

IMPACT ON STATE FINANCES

• The total farm loan waiver announced by different state governments was Rs 2.36 trillion.
• Of this, Rs 1.5 trillion has already been waived.
• Last big farm loan waiver was announced by the UPA government in 2008-09 and it was Rs 0.72 trillion.
• Of this, actual waivers were only Rs 0.53 trillion.

• The actual waivers peaked in 2017-18 — in the wake of demonetisation and its adverse impact on farm incomes.
• It amounted to almost 12% of the states’ fiscal deficit.
• A farm loan waiver by the government implies that the government settles the private debt that a farmer owes to a bank.
• But doing so eats into the government’s resources.
• This in turn, leads to one of following 2 things:-
• The concerned government’s fiscal deficit goes up.
• It has to cut down its expenditure.

IMPACT ON ECONOMIC GROWTH, INTEREST RATES AND JOB CREATION

• Higher fiscal deficit implies that the amount of money available for lending to private businesses — both big and small — will be lower.
• It also means the cost at which this money would be lent would be higher.
• If fresh credit is costly, there will be fewer new companies, and less job creation
• If the state government doesn’t want to borrow the money from the market and wants to stick to its fiscal deficit target.
• It will be forced to accommodate by cutting expenditure.
• More often than not, states choose to cut capital expenditure.
• As such, farm loan waivers are not considered prudent, Because they hurt overall economic growth apart from ruining the credit culture in the economy, Since they incentivise defaulters and penalise those who pay back their loans.

DOES STATES INCREASE THEIR FISCAL DEFICITS OR CUT CAPITAL EXPENDITURE?

• An analysis of the latest state Budgets by the National Institute of Public Finance and Policy (NIPFP), released last month.
• It shows that, on the whole, state governments stick to their fiscal deficit targets.

• But it has a flip side.
• The way states meet their deficit targets is not by raising more revenues but by cutting expenditure.
• That too capital expenditure is cut relatively more than revenue expenditure.

HOW MUCH STATE FINANCES MATTER?

• Often, analyses of the Indian economy focuses on the Union government’s finances alone.
• But the ground realities are fast changing.
• Study of state finances reveals that all the states, collectively, now spend 30% more than the central government.

CONCLUSION

• State-level finances are just as important as the central government finances for India’s macroeconomic stability and future economic growth

Latest Burning Issues | Free PDF

Sharing is caring!