Farm loan waivers may result in fiscal slippages, spike inflation: RBI

Centre clarified that states would have to find their own resources to fund loan waivers

The Reserve Bank on Wednesday said farm loan waivers by state governments could result in possible fiscal slippages and undermine the quality of public spending.

India's largest state by population Uttar Pradesh, along with Punjab, Maharashtra, and Karnataka are among the states that have announced loan waivers for farmers.

The Centre, however, has clarified that states would have to find their own resources to fund farm loan waivers.

"Implementation of farm loan waivers by states may result in possible fiscal slippages and undermine the quality of public spending, entailing inflationary spillovers," said the third bi-monthly monetary policy statement of the RBI.

It further said that given the limits on raising market borrowings and taxes by states, "farm loan waivers are likely to compel a cutback on capital expenditure, with adverse implications for the already damped capex cycle".

The statement also noted that if states implement salary and allowance increase similar to the Centre in 2017-18, retail inflation based on Consumer Price Index (CPI) could rise by an additional estimated 100 basis points above the baseline over 18-24 months.

The six-member MPC headed by RBI Governor Urjit Patel said the panel remains focused on its commitment to keeping headline inflation close to 4 per cent on a durable basis.

The retail inflation was at historic low level of 1.54 per cent in June.