Farm debt waivers push up interest rate in the economy: RBI Guv Urjit Patel

Farm debt waiver schemes announced since 2014 totalled Rs 1.3 lakh cr, which was about 0.8% of GDP

Farm debt waivers eventually push up the interest rate in the entire economy and crowd out private sector entities from accessing finite resources of market funds, Reserve Bank of India (RBI) Governor Urjit Patel said on Thursday. 

“There is a gamut of issues that have intensified the anguish of our farmers. In this context, farm loan waivers have brought forward the urgency of designing lasting solutions to the structural malaise that affects Indian agriculture,” Patel said in a seminar on agricultural debt waivers. 

However, the waivers lead to “concerns about the macroeconomic and financial implications, how long they will persist in impacting the economy, the possible distortions that they could confront public policies with, and the ultimate incidence of the financial burden”.

Even as credit flow in the agricultural sector had been “generous,” and there was a sizeable volume of subsidised and directed credit flows as well as the various fiscal incentives, “Indian agriculture is beset with deep-seated distortions that render it vulnerable to high volatility,” the governor said. In the absence of “coordinated and sustained efforts to put in place elements of a virtuous cycle of upliftment, loan waivers have periodically emerged as a quick fix to ease farmers’ distress,” Patel said.

The recent farm debt waiver schemes announced by various states since 2014 have totalled Rs 1.3 lakh crore, which was about 0.8 per cent of the gross domestic product. 

“The first impact of any loan waiver is on the balance sheet of lending institutions, be they formal or informal,” Patel said, adding, the quality of assets in the interim deteriorates and provisions crowd out new loans. 

In the second round, loan waivers impact public finances, which should be financed by additional market borrowings, “which pushes up interest rates, not just for the states but for the entire economy”.

“A collateral damage is that private borrowers are crowded out of the finite pool of investible resources as the cost of borrowing rises,” the RBI governor said. The waivers curtail important capital expenditures of states, including harming building infrastructure for agriculture and this deteriorates growth in the sector further.

“While in no way detracting from the acute distress that farmers face with every disruption in crop cycles, it is important to recognise that there are externalities that spill over beyond the farm sector. Eventually, other economic agents and other parts of the economy get affected,” Patel said.