With Maharashtra also joining the farm loan waiver bandwagon, various state governments are expected to waive off $40 billion, or Rs 2,57,000 crore, of farmers’ loans in the run-up to the 2019 general elections in the country, a global banking group has said.
Farm loan waivers will amount to 2 per cent of gross domestic product (GDP) by the 2019 polls, as other states are also likely to follow the BJP’s Maharashtra and UP governments, according to a Bank of America Merrill Lynch (BofA-ML) report.
“We grow more confident of our call that farm loan waivers will spread across states after Maharashtra followed Uttar Pradesh in waiving farm loans on Saturday. This begs the question, how much of farm loans will eventually get waived? $40 billion, or 2 per cent of GDP, in our view, in the run-up to the 2019 general elections.
This covers bank loans to farmers with up to five acres of land,” it said.
How will they be funded? “We assess that the Ministry of Finance will eventually have to come up with a UDAY bond-type solution that will securitise banks’ farm loans into long-dated non-SLR state government paper,” Merrill Lynch said. “It may affect credit culture, although we recognise that a good part of farmer debt arose on rural stress from poor harvests.”
“On balance, farm loan waivers support our standing call of playing consumption over investment, as they will help stimulate rural demand, especially if monsoons water a good crop,” it said. “We expect almost all states to write off about $40 billion of farm loans.”
On Saturday, the Maharashtra government waived off loans of Rs 30,000 crore or $4.6 billion owed by farmers with up to five acres of land by October.
Although the finance ministry has said that states have to fund their own farm loan waivers, that is scarcely possible without disrupting bond markets.
Will farm loan waivers impact rural credit culture? “It is bound to, in our view, although we recognise that a good part of farmer debt arose on rural stress from poor harvests. The UPA government had waived 1.3 per cent of GDP of farm loans in 2008. Farm loan waiver would prove counter-productive for the RBI’s measures to clean up bank balance sheets.”
After the UPA government headed Manmohan Singh announced a loan waiver scheme involving Rs 65,000 crore and three crore small and marginal farmers, the country witnessed more than half-a-dozen loan waiver proposals from various states in the last nine years. More states are now joining the bandwagon.
Earlier this year, Uttar Pradesh Chief Minister Yogi Adityanath decided to waive loans of Rs 36,359 crore taken by about 94 lakh small and marginal farmers in the state fulfilling BJP’s pre-poll promise.
The waiver amount included Rs 5,630 crore loans of seven lakh farmers whose accounts were declared non-performing assets (NPAs) by banks.
Last year, late chief minister J Jayalalithaa had waived the loans of 16.94 lakh marginal and small farmers who own less than five acres of land, imposing a financial burden of Rs 5,780 crore on the state government. The Madras High Court later asked the Tamil Nadu government to waive additional farm loans to the tune of Rs 1,980 crore. The order is expected to benefit over three lakh farmers who were not covered under the loan waiver scheme.
In 2014, the Telangana Rashtra Samithi government headed by K Chandrasekhar Rao waived crop loans of farmers to the tune of Rs 17,000 crore as part of its pre-poll promise. The fourth and final instalment of
Rs 4,000 crore was paid to bankers recently. Crop loans up to Rs 1 lakh of 36 lakh farmers were waived.
In Andhra Pradesh, N Chandrababu Naidu’s Telugu Desam Party promised a farm loan waiver involving Rs 1.50 lakh crore before the state elections in 2014. However, banks refused to play the ball as the amount was huge and they cited reasons like impact on credit repayment discipline to reject the plan. In April, Reserve Bank Governor Urjit Patel had said that a farm loan waiver “undermines an honest credit culture” and could “affect the national balance sheet”. “There are several conceptual issues … I think it undermines an honest credit culture. It impacts credit discipline. It plugs incentives for future borrowers to repay. In other words, waivers engender moral hazard,” Patel said.
“I think we need to create a consensus such that loan waiver promises are eschewed. Otherwise, some sovereign fiscal challenges in this context could eventually affect the national balance sheet,” Patel said.