Do states have fiscal space for farm loan waivers?

From a fiscal viewpoint, Maharashtra is better-placed than most states

After the announcement of a farm loan waiver by the Uttar Pradesh government, farmer protests have intensified in Maharashtra and Madhya Pradesh, with calls for similar loan waivers gaining traction. Do these states have the fiscal space to provide such waivers? If so, is a loan waiver a prudent way of utilising funds?

Take the case of Maharashtra. 

From a fiscal viewpoint, the state is better-placed than most. Its fiscal deficit as a percentage of gross state domestic product (GSDP) has been budgeted to decline from 2.2 per cent in 2016-17 (Revised Estimate or RE) to 1.53 per cent in 2017-18. This is lower than the all-state average of 2.98 per cent in 2016-17 (Budget Estimate or BE). 

Similarly, the state’s debt (liabilities) to GSDP ratio declined from 23.8 per cent in 2010 to 17.6 per cent in 2016-17 (BE). Thus, on both measures, the state is well below the threshold prescribed by the FRBM review committee creating the fiscal space to fund a loan waiver. 

“While from an ideological viewpoint, farm loan waivers should be avoided, owing to problems such as moral hazard, agrarian distress is there,” said Madan Sabnavis, chief economist at CARE Ratings. “If there is fiscal space — Maharashtra does seem to have the space — then they can manage to provide for the loan without cutting expenditure on other items,” he said.

If the state does end up providing a loan waiver to the tune of Rs 30,000 crore, its fiscal deficit for 2017-18 would rise to 2.71 per cent, assuming that its revenues remain at budgeted levels. While this may seem manageable, just to put this number in context — in 2016-17, the state’s capital expenditure was Rs 37,059 crore. On the other hand, Madhya Pradesh has limited fiscal space to finance a loan waiver. 

Its fiscal deficit as a percentage of GSDP rose from 2.49 per cent in 2015-16 to 4.63 per cent in 2016-17 (RE). And though the state has budgeted it to fall to 3.49 per cent in 2017-18, if past trends are anything to go by, there is likely to be significant deviation. The state has projected it to fall to 3 per cent, but by 2020-21.

On the debt to GSDP metric too, the state fares poorly. Outstanding liabilities of the state as a percentage of GSDP are projected to rise from 24.63 per cent in 2016-17 (RE) to 26.51 per cent by 2020-21, leaving it little room to take on additional debt.  

Thus, on both these indicators the state is likely to breach the threshold levels prescribed by the FRBM review committee, leaving it little space to provide for a loan waiver unless it is compensated by cuts on other expenditure. 

“Loan waivers would likely worsen the fiscal deficit and leverage levels of the state government, unless additional resources are mobilised or other expenditure is controlled,” said Jayanta Roy, group head, corporate sector ratings, ICRA. 

“Committed expenditures, subsidies and social welfare schemes tend to be difficult to curtail. There is a significant risk that productive capital spending may end up being reduced to fund a portion of the loan waivers,” he said. 

But the state has other options. The loan waiver could be staggered over a number of years. This will reduce the impact on the yearly fiscal numbers. The state could direct a state-owned entity to issue bonds to pay off banks. This will not show up on the state’s balance sheet. It could also tap into other sources of funds such as public accounts to finance this additional burden.