Farm loan waivers to widen States’ fiscal deficit by Rs 1.07 lakh crore: India Ratings

19 Dec 2017 Evaluate

India Ratings and Research (Ind-Ra) in its latest report has warned that the farm loan waiver scheme announced by five states - Uttar Pradesh, Punjab, Maharashtra, Rajasthan and Karnataka, will widen the combined states fiscal deficit by Rs 1.07 lakh crore or 0.65 percent of Gross domestic product (GDP) in the financial year 2018. It also revealed that the combined fiscal deficit of these States for the year ending March 31 has been budgeted at 2.7 percent of GDP or Rs 4.48 lakh crore. Besides, it noted that nine States have budgeted a rise in their fiscal deficits/gross state domestic product (GSDP) ratios this year compared to 19 states in FY17.

As per the report, the combined fiscal deficit of the States in FY18 at 3 percent of GDP or Rs 4.99 lakh crore and this is higher than the budgeted figure but considerably lower than FY17. India Ratings’ report is based on the analysis of 29 State budgets, the impact of the farm debt waivers announced outside the budgets and implementation of the goods and services tax (GST) from July 2017. Further, it stated that out of the five states, the farm debt waivers of UP and Punjab are part of their respective FY18 budgets, while that announced by Maharashtra, Rajasthan and Karnataka are outside their annual budgets. It added that these States will have to either generate additional resources to fund farm debt waivers or cut their budgeted expenditure.

The rating agency further said that if such announcements are funded through expenditure compression, the axe usually falls first on the budgeted capital expenditure, followed by social expenditure. It also said that both cuts do not augur well from the point of view of the medium to long-term growth prospects of these States. It highlighted that Andhra Pradesh and Telangana, which announced a farm debt waivers of Rs 43,000 crore and Rs 17,000 crore, respectively, in 2014, however have adopted a staggered payment mechanism. Though, it also observed that despite fiscal pressures, the encouraging feature of FY18 state budgets is near stability in the combined revenue deficit and some improvements in the combined primary deficit of the states compared to FY17.

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