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Decoding the Impact of Farm Loan Waivers on the Economy
Wed, 28 Jun Pre-Open

The states including the likes of Uttar Pradesh, Maharashtra, Punjab and Karnataka have decided to waive agricultural loans worth Rs 1,000 billion. Haryana and Tamil Nadu too are likely to follow suit. Soon it might happen that all the remaining states give in to peer pressures from other states and waive off famers loans.

Why has this situation arisen despite a normal rainfall in the preceding financial year?

There were no loan waivers in the fiscal year of 2013-14 and 2014-15 when the country faced a drought situation for two consecutive years. Then why now?

The larger impact seems to have come from demonetization. The farmers usually deal in cash. Notebandi led to a huge liquidity crunch. This in-turn led to a crash in the prices of crops like onions, tomatoes and potatoes, which dented farmers income.

In a farm loan waiver, state government bears the brunt of the loans lent by the farmers. It is the state government who makes the payment to the banks.

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As the state government, would have to borrow to repay these massive loans, their balance sheets are set to come under pressure. This will create fiscal challenges, leading to lower public expenditure which could hamper economic growth.

The balance sheet of state governments are already under some pressure as they took over the loans of the power distribution companies under the Ujwal Discom Assurance Yojana (UDAY). This additional burden of loan waivers could lead to the states not adhering to their fiscal deficit targets.

We believe that the farm loan waivers will not be of much help to the farmers, as the farmers still rely on traditional sources of financing such as lending from moneylenders rather than from banks. Moreover, in our recent The 5 Minute WrapUp we have highlighted the inefficacy of the farm loan waivers.

To resolve the issues pertaining to agriculture sector, more structural reforms are required such as making investments in areas such as irrigation, water conservation, better storage facility, market connectivity. Unless such structural reforms are undertaken, there won't be much respite for the farmers.

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