A former Reserve Bank of India (RBI) governor had told the Election Commission that loan waivers promised by political parties during election campaigns posed risks to the banking system as this practice discouraged borrowers from repaying loans even when they were in a position to do so, finance minister Arun Jaitley informed the Lok Sabha on Friday.
Jaitley didn’t name the governor but, in a written reply, said the former RBI chief, while addressing a conference, had also said loan waivers and subsidies “distort the credit discipline”.
While it’s not clear who that ex-governor was, Raghuram Rajan had in 2014 said interest subventions and loan waivers could distort the price of credit and also lead to misuse of such schemes. Last year, current governor Urjit Patel had said “steep interest rate subventions and large credit guarantees impede optimal allocation of financial resources and increase moral hazard”. Even former State Bank of India chairman Arundhati Bhattarcharya had been critical of farm loan waivers.
According to Jaitley, the former governor had written to the Chief Election Commissioner, flagging “the risk of promising loan waivers by political parties at election time as beneficiaries stop making payment even if they are financially in a position to make them and that this affects the banking sector as well as the state finances”.
The burden of farm loan waivers could be as much as Rs 2.2-2.7 lakh crore if all states start offering the relief and would stoke short-term deflationary shock in an economy yet to gain full momentum, the Economic Survey (volume-II) said in August last year. Even if only the five states that have made the announcement implement the loan waiver (Uttar Pradesh, Karnataka, Maharashtra, Punjab and Tamil Nadu), the estimated impact could be Rs 1-1.25 lakh crore, it said.
The survey estimates that loan waivers, if extended by all states, could reduce aggregate demand by as much as 0.7 per cent of GDP, imparting a significant deflationary shock. The Centre has already made it clear that it will not offer any special package to states for farm loan waivers and they have to fund it on their own, while sticking to fiscal discipline.
For states with fiscal space, loan waivers would add about Rs 6,350 crore to demand via the additional interest costs. However, for states without such space, waivers could trim demand by about Rs 1.9 lakh crore. Uttar Pradesh last year announced waivers of up to Rs 1 lakh for all small and marginal farmers, while Punjab’s limit is Rs 2 lakh for small farmers without defining who these are, and Karnataka has limited the waiver amount to Rs 50,000. But Maharashtra’s waiver terms are still not very clear.
Even the Rs 60,000-crore farm loan waiver scheme announced by the UPA government ahead of the 2009 general election attracted criticism of the Comptroller and Auditor General of India, which had said that 8.5 per cent of farmers out of 80,299 accounts audited were not eligible for debt waiver.