Moneycontrol
Last Updated : Dec 15, 2018 06:13 PM IST | Source: Moneycontrol.com

Waiver conundrum: Congress, BJP in race to write off loans, but experts advise against it

The Congress now faces a mammoth task of fulfilling its promise to write off loans within 20 days of forming the government. More than 70 percent of the population in these three states lives in rural areas and is dependent on agriculture for their livelihood.

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While campaigning in the poll-bound states, particularly the Hindi heartland, Congress President Rahul Gandhi had made tall promises about waiving off farm loans within 10 days of coming to power.

After Congress emerged victorious in Chhattisgarh, Rajasthan and Madhya Pradesh, party president Rahul Gandhi, at a press conference, reiterated that the process of waiving off loans will start as soon as the government assumes power.

Now the Grand, Old Party faces the mammoth challenge of fulfilling its promise. More than 70 percent of the population in these three states lives in rural areas and is dependent on agriculture for their livelihood.

According to a report in Business Standard, the Congress will have to spend at least Rs 220 billion in Rajasthan, Rs 160 billion in MP, and Rs 30 billion in Chhattisgarh in order to keep their promise of waiving off crop loans upto Rs. 1,00,000 per indebted farmer. This will add pressure to the already strained fiscal situation of these states.

BJP central leadership also keen to write off loans ahead of Lok Sabha polls

Meanwhile, the BJP seems to be taking cognizance of the fact that they have lost power because of disenchantment among rural voters, a situation similar to that in 2004. A Reuters report has reported that the Narendra Modi-led government at the Centre is mulling over writing off farm loans to claw back the support of India’s 263 million farmers.

This would cost the NDA government at the Rs. 4 lakh crore, which is approximately five times more than the Rs. 72,000 crore that the UPA government promised in 2008. If the Prime Minister Narendra Modi decides to act on the loan waiver, it could strain India’s already widening fiscal deficit.

The government had targeted to maintain the GDP at 3.3 percent of the GDP for the 2018-19 financial year, equivalent to Rs. 6.24 lakh crore, but the mark was breached seven months into the fiscal. Hence, the question surfaces, how will the government secure so much money?

The Centre could turn to the Reserve Bank of India in such a situation. According to a report in The Wire, one of the primary disagreements between the RBI and the Centre is sharing of surplus reserves. The government has argued that the RBI is holding too much as reserves and wants it to release Rs 3.6 lakh crore to the government.

Is farm loan waiver really a viable solution?

An SBI reports has pointed out that farm loan waivers amounting to Rs. 4 lakh crore “can wreck the credit culture”.

Instead, the report pointed out, there is a dire need to increase the farmer’s income through the introduction of income support schemes. “There are 26 crore small and marginal farmers and such a scheme is the only way to support the farmers, apart from ensuring market prices for their produce, the report said. It suggested providing Rs 12,000 per family per year in two installments, which will entail an outgo of Rs 50,000 crore nationally,” the report stated.

Concurring with the findings of the aforementioned research, former RBI governor Raghuram Rajan said that the problem with writing off farm loans is that it will impact only a “subset of farmers who get those loans and it often goes to the best connected rather than the most poorly off”.

Rajan asserted that writing off farm loans not only inhibits investment in the farm sector, but also puts pressure on the fiscal of states which undertake such waivers.

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First Published on Dec 15, 2018 06:13 pm
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