Risk Of Fiscal Slippage Has Risen With Farm Loan Waivers, RBI Governor Warns

The Reserve Bank of India on Wednesday warned against the recent spate of farm loan waivers across the country. The risk of fiscal slippages which can entail inflationary spillovers has risen with these waivers, RBI Governor Urjit Patel said while announcing the monetary policy on Wednesday.

“There is a risk that unless there is existing fiscal space in state government budgets or some space is found, the likelihood of going down the slippery path and dissipating the important gains that we have made in the fiscal rectitude over the last 2-3 years can come about,” Patel said.

The country's history has seen significant fiscal slippages permeating into rising inflation “sooner or later”, the governor said.

Also Read: The Five Banks Most At Risk From Farm Loan Waivers

During the previous policy announcement too the governor had warned against farm loan waivers, saying that it undermines an “honest credit culture, affects credit discipline and poses risk to inflation”. This was after the newly elected Uttar Pradesh state government had waived loans worth Rs 36,359 crore in the state. The Telangana government too announced a similar loan waiver costing Rs 17,000 crore to the state exchequer.

The latest to join that bandwagon was Maharashtra which waived loans worth Rs 30,000 crore for small and marginal farmers. Chief Minister Devendra Fadnavis said the waiver would be implemented before October 31 this year after protesting farmers intensified their stir for the sixth day, disrupting supplies of essential commodities in the state.

Bank of America Merrill Lynch had on Monday warned in a report that loans worth almost $40 billion, equivalent to 2 percent of India's GDP, will be waived in the run-up to the general elections in 2019.

Also Read: BofA ML Warns Of A Surge In Farm Loan Waivers Ahead Of 2019 Elections