Loan waivers not only impact bank balance sheets but also increase government spending which is then financed by additional market borrowings, pushing up the interest rate, explained Reserve Bank of India Governor Urjit Patel.
As a result, “the quality of assets deteriorates and bridge provisions crowd out new loans”, Patel said at an RBI seminar on Thursday to discuss the efficacy and limitations of credit waivers in agriculture.
Even if loan waivers are accommodated in the Budget, it comes at the cost of reduction in government spending, especially capital expenditure, which Patel said was the “most vulnerable category”.
India has seen a spate of credit waivers for farmers by individual states this year, a trend that was triggered when the BJP government in Uttar Pradesh pardoned farm loans worth Rs 36,000 crore in April. Maharashtra, Punjab and Karnataka followed with either full or partial waivers. Patel had earlier warned that waivers pose risks to inflation and credit discipline. Fitch and Moody's have both flagged off concerns of undue burden on the states' exchequer.
Also Read: Farm Loan Waivers: The Economics And Politics Of Indian Agriculture
In his address on Thursday, Patel said that farm loan waivers result in deterioration in the quality of expenditure, adversely impacting productivity as asset forming investments, even for the agriculture sector, are foregone.
If waivers exceed Budget provisions, they will result in the widening of the fiscal deficit, have an inflationary impact and possible spillovers beyond the farm sector, the RBI governor added.
Patel emphasised the need for policy intervention in the agriculture sector as the "absence of coordinated and sustained efforts" for farmer's upliftment has led to loan waivers emerging as a “quick fix” to ease distress.
Also Read: Farm Loan Waivers Atonement For Lack Of Agriculture Reform, Says Ashok Gulati
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