DNA Money Edit – Farm loan waivers to squeeze state exchequers

Farm loan waivers

Farm loan waivers are threatening to derail state finances. An ongoing strike by farmers in Maharashtra has forced the state government to offer Rs 30,000 crore in loan write-offs. Not happy with the offer, farmers are demanding a bigger waiver. As Maharashtra follows the footstep of Uttar Pradesh with the populist measure, economists are anxious at the prospects of states exchequers totter offering such concessions. The debt waiver scheme, offered by the BJP-led Maharashtra government, would have benefited all farmers with less than 5 acre of land. The striking farmers have asked the government to bring all farmers under the ambit of the waiver.

A report by Bank of America Merrill Lynch has warned that $40 billion, equivalent to 2% of GDP, will be written off in the run-up to 2019 elections. Farm loan waivers will spread across states, according to analysts who authored the note. In the run-up to the state elections in UP, BJP had promised a massive waiver, and soon after the government came to power, it announced Rs 36,000 crore in farm loan waivers. In 2008, the UPA government had announced a much bigger, Rs 60,000 crore debt waiver for the agricultural sector.

Surely, such moves would be counter-productive to Reserve Bank of India’s efforts to clean up bank balance-sheets that are saddled with bad loans. The central bank has been repeatedly raising a red flag on loan waivers, calling it a “moral hazard”. As the governor Urijit Patel pointed out, waivers undermine an honest credit culture. It also leads to crowding out of private borrowers as high government borrowing tends to impose an increasing cost of borrowing for others. States will have to fund their own loan waivers but at the cost of disrupting the bond markets

[Source”cnbc”]