Farm loan waivers may harm fiscal discipline; stoke inflation: RBI

The Reserve Bank of India (RBI) on Wednesday warned that large-scale farm loan waivers by state governments will severely harm the country’s fiscal health and may spur inflation.

RBI Governor Urjit Patel said unless state governments’ budgets allow that fiscal space to go in for a loan waiver, it would be risky to tread on that path.

The risk of fiscal slippages, which by and large can lead to inflation, has risen with the announcements of large farm loan waivers. The risk of going down the "slippery path" of waiver could dissipate the important gains that the states made in fiscal rectitude over the past two-three years, Patel said addressing media after second monetary policy review for FY18.

Early this month, the Maharashtra government announced loan waivers in the state for small and marginal farmers. It plans to implement the waiver before October 31. With this decision, about 10.7 million farmers with less than five acres of land would be eligible for benefits. The fiscal burden of the scheme is estimated at Rs 30,000 crore. 

In April, the Uttar Pradesh government had waived farm loans worth Rs 36,000 crore.

Like the RBI, the National Bank for Agriculture and Rural Development (Nabard) has also flagged adverse effects of waving off credit. There should not be omnibus waivers and such schemes should be designed only for the needy, the Nabard had said in April.

Farmers in Madhya Pradesh, too, have been agitating since June 1, seeking loan waivers, higher minimum support prices and other benefits. There has been a clamour for similar schemes in other states such as Haryana and Tamil Nadu.