The farm loan waivers announced by various states, including Madhya Pradesh, Rajasthan and Chhattisgarh, will adversely impact the combined capital spending of the states, warns a report.
States' capital spending is a major driver of investment growth which drives the economy, and historically, it has been higher than capex undertaken by the Centre.
For the current fiscal, states' capex is budgeted to be higher by 37.5 per cent. It was 36.6 per cent higher as per FY18 revised estimates.
"During periods of fiscal adjustment, capex becomes the soft target for deficit control. This has been witnessed in Maharashtra, Rajasthan and Karnataka, when they announced farm loan waivers outside budget in FY18," according to DK Pant, the chief economist at the domestic rating agency India Ratings Thursday.
Despite mobilising revenue receipts higher than budgeted, these states could not keep revenue deficit at the budgeted level due to increased revenue expenditure caused by the farm loan waivers, it said.
Rajasthan and Karnataka lowered their capex by 12 per cent and 2.5 per cent, respectively, to offset the increased revenue expenditure but still failed to keep fiscal deficit at the budgeted level.
Although fiscal deficit of Maharashtra was lower than budgeted due to lower than budgeted capex, it said.
Since FY01, the share of the aggregate capex of the states in the total capital expenditure done by the Centre and the states together has been in excess of 50 per cent. It, however, fluctuated in the range of 51-65 per cent till FY16 and at 67.2 per cent in FY17, notes the report.
In fact, the share of states' aggregate capex has been rising since FY14, aided by the additional fund inflows due to the 14th Finance Commission award and the taking over of discom debt by several states during FY16 and FY17.
"We believe policy-makers as well as companies should focus more on the states' budgets than the Centre's," the report concludes.
It can be noted that the new Congress governments in these states quickly announced farm loan waivers as that was one of the key campaign promises.
While the new MP government announced agri loan waivers worth Rs 350-380 billion, in the neighboring Chhattisgarh it is about Rs 140 billion and in Rajasthan it's about Rs 180 billion.
Last year, larger states like UP, Maharashtra, Karnataka, Tamil Nadu had also announced farm loan waivers as financial distress kept rising among farmers.
More such sops are likely from AP, Haryana and Odisha, which have a fair share of agri credit and are poll-bound along with the national elections. If these states individually announce debt relief, the combined waiver would be at least around Rs 600-700 billion, say analysts.
According to SBI Research debt, the combined outgo from the states due to farm waivers is the tune of Rs 1.2 trillion since 2017, the implementation of which is still underway.