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Farm debt waivers may lead to 20-bps permanent rise in inflation: RBI study

RBI staff study estimates other states could end up waiving another Rs 40,000-57,000 cr of farm loans in all

Anup Roy  |  Mumbai 

The low growth in agriculture in Q1 FY18 was not entirely unexpected as the average growth in the sector in the first quarter of the last five fiscals  was a meagre 2.5%

A study by the Reserve Bank of India (RBI) staff says that if the combined fiscal deficit of the states on account of farm debt waivers goes up by 40 basis points to 5.9% of gross domestic product, there could be around a 20-basis-point permanent increase in inflation, starting 2017-18.

One basis point is a hundredth of a percentage point.

This is not the official view of the RBI, but of some of its research staff, but the central bank has been warning about the impact of farm debt waivers on and interest rates.

Governor in a recent speech said farm debt waivers eventually pushed up interest rates for the whole economy.

The recent spate of farm debt waivers, starting 2014, has reached Rs 1.3 lakh crore and more states are due to announce their versions of waivers.

The staff study estimates other states could end up waiving another Rs 40,000-57,000 crore of farm loans in all.

In 2017-18 itself, the loan waiver amount likely to be released would be around Rs 88,100 crore, the staff study estimated, which would be 0.5% of gross domestic product.

This may lead to additional market borrowing, and pruning wasteful expenditure, and, as result, the consolidated gross fiscal deficit may rise by 20-40 basis points.

“Higher fiscal deficits per se can lead to an increase in expectations and actual inflation,” said the study’s authors Pratik Mitra, Indranil Bhattacharyya, Joice John, Indrani Manna, and Asish Thomas George. 

Furthermore, “state government farm loan waivers have the potential to crowd out corporate borrowings if financed through SDL (state development loans) issuance,” the study said.

First Published: Tue, September 12 2017. 00:54 IST
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