As Karnataka Chief Minister H D Kumaraswamy announced additional farm loan waivers, Reserve Bank of India (RBI) released a report warning state governments of fiscal slippages.
The report states farm loan waivers by some states as one of the major factors for fiscal stress. The contribution of loan waivers is estimated to be 0.32 per cent of the GDP as per the revised estimates compared to budgeted estimates of 0.27 per cent.
The report also says that the percentage of loan waivers to the total fiscal deficit varies between 4.6 per cent in Tamil Nadu to 60.9 per cent in Uttar Pradesh for the year 2017-18.
According to the budget estimates for the year 2018-19, it varies between 0.1 per cent of GSDP to 0.8 per cent of GSDP.
‘It is likely that the pending debt waiver promises would spill over into coming fiscal years and continue to squeeze fiscal space,’ said the report.
The report also said, “Farm productivity enhancement through pecuniary incentives like debt waivers is unproven. Past experiences with loan waivers Agricultural Debt Waiver and Debt Relief Scheme (ADWDRS of 2008) show that debt relief helps in reducing household debt but there appears to be no evidence of increase in investment and productivity of beneficiary households.”
The report cautioned that loan waivers may disincentivise banks from lending to agriculture in the long term.