In its policy statement released last week, the monetary policy committee (MPC) of the Reserve Bank of India (RBI) pointed out that the implementation of farm loan waivers across states could hurt the finances of states and make them throw good money after bad, and stoke inflation. So far, three major states—Uttar Pradesh (UP), Punjab and Maharashtra—have announced large-scale farm debt waivers. The cumulative debt relief announced by the three states amounts to around Rs.77,000 crore or 0.5% of India’s 2016-17 GDP. If poll-bound states—including Gujarat, Karnataka, Rajasthan and Madhya Pradesh— too announce farm debt waivers and extend it to one-third of farm loans in their respective states, then the aggregate amount of farm debt waivers before the 2019 elections would balloon to Rs.2 trillion, or 1.3% of India’s GDP. The current cost of debt waivers, though large, is not yet alarming. But what if all states, and not just the poll-bound ones, decide to waive farm loans, and extend it to half of all farm debt rather than just one-third? In such a case, the total waiver amount will substantially increase to Rs6.3 trillion or around 4% of the GDP. The impact on state finances could have been justified had the waivers provided meaningful relief to India’s distressed rural economy. But that is unlikely to happen since the poorest farmers in India typically rely on non-institutional sources of credit.

(Live Mint)