Loan waivers encourage states to be fiscally reckless

In Economy, Macro Economy, The Print by Praveen ChakravartyLeave a Comment

As Uttar Pradesh and Maharashtra write off farmers’ loans and Madhya Pradesh, Haryana, Rajasthan and Punjab struggle to tackle fresh demands for debt relief, Finance Minister Arun Jaitley says the Central government will not help foot the bill. And RBI Governor Urjit Patel calls loan waivers a “moral hazard”. Is it time to revisit this culture of farm loan waivers? We ask experts.

Loan waivers encourage states to be fiscally reckless — Praveen Chakravarty, Senior Fellow, IDFC Institute, Mumbai.

Whether farm loan waivers are good or not is a false binary. Loan waivers, be it agriculture or corporate loans, for farmers or industrialists, can be good or bad depending on the context and circumstances. It is only important that the decision to grant such waivers should also fully capture the costs of such decisions. Agriculture is a state legislative subject. A state government announcing farm loan waivers should also bear all the fiscal consequences of it.

Today, state governments announce farm loan waivers which are financed directly or indirectly (through special grants for schemes) by the Union government. The Union government’s finances in turn are bolstered by tax revenues from a handful of states. So, in essence, the richer states are paying for the poorer states’ farm loan waivers. This leads to a moral hazard problem for states which are encouraged to be fiscally reckless.

If the Union government were to allow the state governments to fend for themselves, it is likely that such loan waiver policies will be more measured and granted only under true emergencies. If say, the UP government knew clearly that farm loan waivers would mean cuts in budgets to say education or health or drinking water, then it would make a more judicious choice. In the absence of this, there is every incentive for the UP government to reap the benefits of loan waiver policies without having to bear the true costs of it.

The debate over whether farm loan waivers are driven by economics or politics is banal. One cannot separate the two in an electoral democracy.

Published on 14 June, 2017 in The Print