A day ahead of the release of the August retail inflation data, a Reserve Bank of India (RBI) paper has said that farm loan waiver amounting to Rs 88,000 crore likely to be released in 2017-18 by seven states, including Uttar Pradesh and Maharashtra, may push inflation on permanent basis by 0.2 per cent.
In the fourth release Mint Street Memos titled ‘Agriculture Loan Bank Accounts - A Waiver Scenario Analysis and the fifth series titled ‘Farm Loan Waivers, Fiscal Deficit and Inflation, said that some Indian states have announced farm debt waivers recently, which bear ramifications for the fiscal burden of states over the medium term. Empirical estimates suggest that fiscal deficit can have an inflationary impact. If the combined fiscal deficit for 2017-18 goes up by 40 bps on account of farm loan waivers(both actual and intended), with the budgeted combined fiscal deficit at around 5.9 percent for 2017-18 and inflationary momentum remaining benign, ceteris paribus, this may lead to around 20 bps permanent increase in inflation, starting 2017-18.
Elaborating further, it said that loan waivers could add to the fiscal burden over the medium term as they are essentially a transfer from tax payers to borrowers. Based on stylized assumptions, the total loan waiver amount that is likely to be released in 2017-18 by seven states is around Rs 881 billion (0.5 per cent of Gross Domestic Product, GDP). Depending on possible sources of financing, the additional burden including (i) additional market borrowing and (ii) pruning of wasteful expenditure, this may result in an increase in the consolidated Gross Fiscal Deficit - Gross Domestic Product (GFD-GDP) ratio of the states by about 20-40 basis points (bps). Higher fiscal deficits per se can lead to an increase in inflation expectations and actual inflation.