Farm loan waivers threaten to derail state finances

Trend began after UP announced a farm loan waiver of Rs 36,000 cr & got stronger with Maharashtra

The chorus of farm loan waivers across several states has aggravated concerns about state-level finances. The trend, which started after Uttar Pradesh announced a farm loan waiver of Rs 36,000 crore in March and got stronger with Maharashtra agreeing to a Rs 30,500 crore waiver earlier this month, is indeed worrisome. Farmers in several other states such as Madhya Pradesh and Karnataka have also pitched for waivers. According to an analysis by IndiaSpend, the amount involved could be a staggering Rs 3.1 lakh crore — big enough to fund the Prime Minister’s Gram Sadak Yojana, a national rural road scheme, 16 times over. Although this latest episode of farm loan waiver started with Prime Minister Narendra Modi making such a promise in the run-up to the UP Assembly election, the central government has now sought to distance itself from any funding obligations. But the fact is that such waivers will impede capital expenditure in agriculture because many states are in no position to bear the burden. For instance, in UP’s case, the waiver amounts to 2.6 per cent of the state’s gross domestic product. For perspective, UP’s fiscal deficit, according to the latest Budget, was pegged at 2.9 per cent of state GDP and the 14th Finance Commission had stipulated state fiscal deficits should not exceed 3 per cent of state GDP.

What makes this trend particularly worrisome is the timing. While the central government has notched up reasonable success in terms of achieving fiscal consolidation over the past four years, much of this good work has been undone by the slippages at the state level. In stark contrast to the trend at the central level, the combined fiscal deficit of states has risen from 1.93 per cent of GDP in 2011-12 to 3.6 per cent in 2016-17. This is the highest in the past 12 years. Till the last fiscal year, much of the expansion had happened on account of the growing capex expenditure. The big worry, especially during the last fiscal year, was the slippage on account of UDAY or the Ujwal Discom Assurance Yojana, which is a financial turnaround plan for state-owned power distribution companies. Farm loan waivers will only exacerbate this trend. Estimates suggest that if the fiscal slippage is not staggered over multiple years, it is likely to be 1.0-1.3 per cent of GDP in 2017-18. The Reserve Bank of India has made it a point to repeatedly warn against the inflationary impact of such fiscal slippages.

To be sure, even without the threat of waivers, states had enough reasons to worry about their finances. For one, state finances have not yet taken the full hit of the Seventh Pay Commission recommendations. As more and more states align with the pay increase at the central level, slippages will go up. The other big factor is the roll-out of the goods and services tax (GST) across the country from July 1. This, in turn, is likely to bring in a lot of disruption — not the least because many firms, especially the smaller ones, are possibly not yet ready for the GST regime. As such, there is little clarity on the impact the GST would have on states’ revenue stream.