Ria-Award-NIght3Several States of India are in the grip of an agrarian crisis on the account of farm loan waivers. After Uttar Pradesh, Maharashtra and Madhya Pradesh have now joined the ever-growing list of states that have announced costly bailouts for farmers. This exercise is a bad precedent being set for India, which is trying to project and adopt macroeconomics and embracing globalisation of doing business. More so it perpetuates a bad credit culture and threatens to extend inflationary risks, limiting the Reserve Bank of India’s ability to bring down interest rates. Already, state finances are under strain where revenues have stagnated but spending ballooned, pushing their combined deficits to their highest in 13 years. Writing off loans can eventually affect the national balance sheet through fiscal slippages and inflationary spillovers. Although the financial reforms of the central government helped cut the annual deficit from 5% of GDP in 2013 to about 3% currently, but our debt-to-GDP ratio is still one of the highest at about 68%, among the emerging economies. That must fall below 60% over the next three years to warrant a rating upgrade. The financial mismanagement of states can derail this process of fiscal prudence under taken by the centre.

Mr. Tushar Aggarwal, a entrepreneur in Agri Business is of the opinion that these farm loans waivers are sheer waste of tax payer’s money.  “This kind of activity would set a bad precedent and motivate the farmer not to return the loans in future,” he explained. Instead, he added, “The Government should promote and encourage end sale points of agri products.” He welcomed the steps taken by the government in banning the exports of Basmati rice against DA and expects the same for non-basmati as well and also for all the major commodities exported from India.  Mr. Aggarwal further suggested, ” the government should introduce ‘Minimum Export Price’ –to counter the moves of countries like Iran that have imposed a ‘Maximum Import Price,‘ whereby there is a cap on selling Agri Products below this designated price. This would encourage and create healthy business environment leading to better price realisation to the exporters which will lead to better realization to our farmers.” It is a big worry that things are unlikely to get better soon as debt write-offs are often a plain perverse political incentive that increases the likelihood of reckless copycat borrowing.

In India where annual agriculture slippages are in the tune of Rs 96,000 crore, farm loan waiver is just a poll sop with no long term economic gain for farmers in distress. The money waived could be invested for creating infrastructure that makes farmers independent of cartel of traders and help them to reap maximum economic benefit of their produce. A recent Bank of America Merrill Lynch (BofA-ML) report estimated that states were likely to waive off at least $40 billion, or 2% of national GDP, in farm loans in the run-up to the 2019 general elections. The answer lies in disciplining state spending by drawing a distinction between prudent spenders and recklessly borrowers. The other way could be to limit the federal guarantee on their borrowings, especially for populist measures such as farm loan waivers. The big question is what will happen if the businessmen start demanding the loan waivers too?

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