On Thursday, the Karnataka government announced a Rs 34,000-crore scheme waiving defaulted crop loans up to Rs 2 lakh taken by 17.32 lakh farmers in the state till December 31 last year. The scheme comes just a day after the Union government announced steep hikes in the minimum support prices (MSP) of crops grown in the current kharif season, based on a new formula that gives farmers a minimum 50 per cent return over their estimated production costs. Both decisions entail significant fiscal costs. The extra outgo from the MSP increases on paddy alone will be around Rs 15,000 crore. The budget presented by Karnataka Chief Minister H D Kumaraswamy has set aside Rs 10,500 crore for the loan waiver, which covers dues to nationalised banks as well as cooperatives that were already part of the previous Siddaramaiah-headed Congress government’s scheme.
While the political context for the above measures — national elections are scheduled in about nine months — cannot be missed, a less appreciated fact, though, is the economic circumstances in which these are being unveiled. Massive farm loan waivers were announced previously as well, including by Maharashtra and Uttar Pradesh last year. The difference between then and now is the macroeconomic situation, where concerns over India’s “twin deficits” have resurfaced. Last year, around this time, the Centre’s borrowings through primary auctions of 10-year bonds were at just over 6.5 per cent.
The cost today is almost 7.9 per cent. State governments are, likewise, currently borrowing for 10 years at roughly 8.55 per cent, as against under 7.3 per cent a year ago. This is partly because banks, the main investors in government securities, are no longer sitting on surplus funds from the deluge of deposits received after demonetisation. Moreover, rising global interest rates due to unwinding of easy-money policies by major central banks has resulted in foreign portfolio investors turning from net buyers in Indian debt markets, to the tune of $23.02 billion (Rs 148,807 crore) in 2017, to net sellers of nearly $6 billion (Rs 40,543 crore) so far this calendar year.
Simply put, while pre-election populism isn’t good in the long run, it isn’t going to be cheap either — especially in these times of turbulence in financial markets worldwide. With India’s current account deficit more than trebling from $15.3 billion in 2016-17 to $48.7 billion in 2017-17, and projected to further rise to $75 billion this fiscal, mainly courtesy oil, slackening on fiscal prudence can prove very costly. We saw it in May-August 2013, when foreign funds “shorted” the rupee citing the country’s unsustainable twin deficits and led to the RBI sharply raising interest rates. If this happens again, it would be disastrous.