How Farm Loan Waivers Could Risk Future Growth

Karnataka Chief Minister Siddaramaiah on Wednesday announced that the state will waive off farm loans up to Rs 50,000 which were taken till June 20, a move that will cost the state exchequer Rs 8,165 crore. The announcement by the Chief minister on microblogging site Twitter makes Karnataka the fourth state to waive off farmer loans this year, after Punjab, Maharashtra and Uttar Pradesh. Karnataka's farm loan waiver, which will give much needed relief to an estimated 22 lakh farmers, did not however win the approval of SBI Research economists who said that the past farm loan waiver had resulted in worsening of repayments on future loans.

In a report, SBI Research - the economic research arm of the country's largest lender State Bank of India - also said that state finances could be adversely hit after farm loan waivers as some states have faced revenue losses in recent times due to alcohol bans and restructuring of loans to state electricity boards under the UDAY program.

"With Centre distancing itself from the stance taken by states on the farm loan waiver front and proceeds from GST uncertain in initial period and the implementation of UDAY bonds, states will have a tough task cut out for them if they want to achieve the budgeted deficit of 3 per cent," SBI Research said.

While the Bharatiya Janata Party (BJP) has claimed credit for the loan waiver in Karnataka, the Centre has ruled out any waiver of farm loan and said it will adhere to fiscal targets. On Tuesday, Finance Minister Arun Jaitley said the Centre is not considering any such plan.

While acknowledging that demand for a loan waiver currently has been accentuated perhaps by two successive years of scanty rainfalls, SBI Research warned that due to the adverse effects of farm loan waivers, states like Punjab - which is worst hit due to the move - will make provisions of farm loan waiver in their budgets in multiple years as this will not impact fiscal deficit in one single year.

"While loan waivers may give temporary relief to farmers and boost rural consumption, funding of the same would likely worsen the fiscal deficit and leverage levels of the state governments, unless additional resources are mobilised or other expenditure is controlled," credit rating agency ICRA said.