Podcast | Digging deeper - A closer look at farm loan waivers in India

Farm loan waiver - the thing everyone knows has reached proportions that are bad for the economy but can’t be avoided because of electoral repercussions. This week, the RBI went so far as to state unequivocally that farm loan waivers are a moral hazard, saying their track record for improving productivity is "unproven". The reserve bank said studies suggest debt waivers have also led to a shift to informal sources of finance, and also added that they possess a risk to inflation.

According to the central bank, the broader state of deficit across India looks like this: as per the revised estimates, for FY19, most states hope for a 0.2 percent revenue surplus as against a deficit of 0.4 percent. This will lead to a gross fiscal deficit of 2.6 percent, against 3.1 percent in FY18. The RBI said farm loan waivers alone contributed to a third of overall slippage worries, with a 0.05 percent slippage of the overall 0.13 percent on revenue expenditure. 

Farm loan waivers touched 0.32 percent of the GDP, or 4.99 lakh crore rupees, In FY18 as against estimates of 0.27 percent. The Reserve bank expressed concern that more such moves are pending for the fiscals ahead.

India’s first major farm loan waiver of Rs 10,000 crore was announced in 1990 by Prime Minister V P Singh. According to the Economic & Political Weekly, it took banks nearly nine years for banks to recover this amount.