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Ahead of the state assembly polls later this year, the Maharashtra government has announced a Rs 7,394 crore farm electricity waiver. The government has promised to entirely waive the interest and penalties, and pay 50 per cent of the arrears owed up to March 31. In case farmers who actually paid their dues felt left out, the government declared that it would give them three months of free electricity. But the Maharashtra government’s freebie is small change compared to Andhra Pradesh Chief Minister Chandrababu Naidu’s Rs 54,000 crore farm loan waiver — in 2009, the UPA’s national loan waiver cost Rs 60,000 crore. Telangana, too, has announced a waiver, though on a smaller scale. Taken together, these announcements put the Centre’s alleged impending financial belt-tightening into perspective. The Centre may send reformist signals, but it is up to the states to trim their fiscal deficits, which collectively amounted to 2.3 per cent of the GDP in 2012-13.
But more than just being financially unsustainable (Maharashtra’s fiscal deficit is estimated to be Rs 30,965 crore this year and the new Andhra Pradesh starts out with a revenue deficit of Rs 15,900 crore), there is a moral hazard problem associated with rewarding defaulting. In the case of banking, in particular, spreading the net of formal finance will not be possible unless there is entrenched repayment discipline. There may be a case that, at a time when corporate debt restructuring is widely talked about, relief to desperate farmers is not out of place. But such blanket waivers are not the way to go. They are sloppily targeted and privilege the better-off. It could be argued, for instance, that an utterly deprived farmer would not have access to a bank loan in the first place.
The Centre may have a say when it comes to financing these schemes. Andhra Pradesh, for one, is contemplating either a special package from Delhi or issuing bonds (the latter may not be possible due to RBI rules). The Union government must firmly decline to help finance such programmes, even if it means having to spurn an ally.