Debt waiver schemes likely to eat into states' capital expenditure

The move would boost consumption growth but may adversely impact the quality of fiscal deficit as well as GDP growth, says ICRA

The litany of schemes rolled out to waive farm loans by state governments may put pressure on fiscal profile and hit the outlay for capital expenditure. 
 

It is also likely to give rise to defaults in non-farm loans in rural areas, according to banks and rating agencies.

Aditi Nayar, vice-president and principal economist, ICRA, said that with Assembly elections likely to be held in several states by the end of Calendar Year 2019, there is a possibility of continued pre-election announcements from state governments. 

Accordingly, states may have to curtail the pace of growth of capex to avoid a fiscal slippage.

There is concern that there may be announcements of expenditure on items such as bonuses, MSPs and crop loan waivers, among others, over the next year. 

It would boost consumption growth but may adversely impact the quality of fiscal deficit as well as GDP growth, ICRA said.

Flagging concerns over the risk to state finances, Madan Sabanavis, chief Economist, CARE Ratings, said even if the provision for debt waiver is spread over the years, it will put pressure on state finances as income may not increase at the pace to absorb additional demands.

Finding resources for the farm scheme may become a challenge and capital expenditure may be dented.

Soumya Kanti Ghosh, group chief economic adviser, State Bank of India, said debt waivers are the flavour of the town now. Several states have already announced loan waiver to the tune of Rs 1.2 trillion since 2017, the implementation of which is still under way. Among the states which are due for election next year are Andhra Pradesh, Haryana and Odisha, which have a fair share of agri credit. Even if these states individually announce debt relief, the combined waiver would be at least around Rs 600-700 billion till May 2019. Clearly, this will be a frightening challenge for Indian banks.

The 14th Finance Commission (FFC) has worked out a revised fiscal roadmap for the states to have zero revenue deficit and the fiscal deficit within three per cent of the gross state domestic product (GSDP). 

The Reserve Bank of India, in its study on state finances (Fy18 and Fy19), flagged concerns on fiscal pressures from debt waiver schemes. Visible fiscal pressures are emerging for several states on the expenditure front, particularly on account of pay revisions, interest payments and other state-specific schemes like farm loan waivers.

However, RBI’s new governor Shaktikanta Das declined to share his view on farm debt waiver, saying he won’t give views on all aspects. His two predecessors — Raghuram Rajan and Urjit Patel — had opposed such schemes due to a detrimental effect on credit.

Bankers said the debt waiver gives relief to farmers affected by drought and calamities. This is beneficial outcome. However, there is also downside to such schemes as it hits credit discipline and raises risk of defaults on non-farm loan portfolio (consumer loans).    

In the run-up to the Lok Sabha elections in April-May 2019, the Centre is mulling loan waiver scheme for farmers. While PSU banks get compensated by governments — the Centre and state — after a scheme is announced, the harm to the bank’s balance sheet is much more as borrowers stop repayments in anticipation of such sops. 

PARTIES PLEDGE SERIES OF SOPS

Yogi allocates Rs  15 bn as crop loan waiver  
 

The Yogi Adityanath government on Tuesday sanctioned about Rs  15 billion for waiving crop loan to farmers, who could not avail the scheme last year. Soon after coming to power, the Adityanath government had announced the waiver of crop loans to small and marginal farmers in UP, totalling Rs  360 billion. It was targetted to benefit almost 8.6 million farmers subject to the individual ceiling of Rs 100,000.

Assam approves Rs  6bn farm sops 

The Assam government has approved farm loan waiver of Rs  6 billion, which will benefit around 800,000 farmers of the state, its spokesman said on Tuesday. According to the scheme, the government will write off 25 per cent loan of farmers up to a maximum of Rs  25,000 of all farm debts, Assam government spokesperson Chandra Mohan Patowary said. 

BJP promises relief in Odisha  

The BJP's Odisha unit Tuesday promised to waive farm loans in the state if the party comes to power in the 2019 Assembly elections. The announc­ement was made by BJP state president Basant Panda at a press conference here. Assembly elections in Odisha are due in 2019, along with the Lok Sabha elections.

Panda said the party will also make provision of interest free loans for the farmers in Odisha.

Gujarat announces power bill waiver scheme 

In a new amnesty scheme applicable for rural electricity connections, the BJP-led Gujarat government on Tuesday announced waiving off pending power bills worth Rs  6.25 billion. Applicable for agricultural, domestic and commercial connections in the state, the amnesty scheme will look to entirely waive off pending bills for non-functional or functional connections. The scheme, according to Saurabh Patel, state energy minister, will benefit over 620,000 connections in rural areas.