Amid growing clamour for other state governments to waive farm loans on the lines of the decision by the Yogi Adityanath-led BJP government in Uttar Pradesh, a foreign brokerage today said that the burden from such populist measures was estimated to touch 2 per cent of GDP by the 2019 elections.
"Farm loan waivers of up to 2 percent of GDP in the run up to the 2019 hustings pose fiscal/rate risk and impacts credit culture," analysts at Bank of America Merill Lynch said in a note today.
They said the Yogi Adityanath government's debt waiver of US $5 billion (Rs 36,000 crore) or 0.4 percent of the state GDP, will lead other states to follow such populist suit.
Even though the Centre has asked the states to take care of its finances while declaring such schemes, the note said the states will continue to be in breach of the indicative 3-3.5 percent fiscal deficit numbers. Already most of the states are running over 3.5 percent deficits.
Also Read: Farm loan waivers: A short-term political solution to a much larger problem
Following Yogi Adityanath’s announcement of the crop loan waiver, several other states have seen a rise in demand for similar measures, with Maharashtra, Haryana and Tamil Nadu being the prominent ones. In fact, the Madras High Court even ordered the state to write off the entire farm loan in the state which would entail a hit of over Rs 4,000 crore to the state’s finances.
Terming such measures as a "worry", the note welcomed Reserve Bank Governor Urjit Patel's warning on the farm loan waivers creating a moral hazard by inducing farmers not to pay and also spiking rates.
The American brokerage said the farm loan waivers are a "key risk" to the new fiscal deficit roadmap proposed by the NK Singh committee.
Once the demand for credit picks up, such measures can spike yields and put pressure on lending rates as banks will want to lend to high-yielding commercial credit, it said.
Also Read: ‘Moral hazard’: RBI reacts to govt’s promise of farm loan waiver
It can be noted that the National Bank for Agriculture and Rural Development (Nabard) has also raised flags of concern on the issue.
It also welcomed the provisions to make fiscal deficit number counter cyclical, saying it is on expected lines.
The achievement of fiscal gap numbers -- 3 percent between fiscal 2018 and 2020 and reduction to 2.8 percent in fiscal 2021, 2.6 percent in fiscal 2022 and 2.5 percent in the next year-- depends on the global situation.
"If it (global economy) turns up/down, rising/falling tax collections from higher/lower activity will contract/expand the fiscal deficit," it said.
