How UP govt financed farm loan waiver

Allocation for power sector cut by half & huge rises estimated in tax collections and central grants

When the newly elected Uttar Pradesh government announced a loan waiver for small and marginal farmers, economists wondered how a cash-short administration would fund this.

However, the state government’s recently unveiled Budget has managed to not only provide for the waiver but kept its fiscal deficit under the prescribed limit of 3 per cent of gross state domestic product. It maintains there would continue to be a revenue surplus, though this is budgeted to decline to Rs 12,279 crore in FY18, from Rs 24,506 crore in FY17. 

A closer look reveals that the government managed this by rejigging its expenditure allocations and by projecting a much higher revenue target than what the interim Budget had presented earlier. On the first, the government cut its power allocation to Rs 17,728 crore in FY18, down from Rs 34,602 crore in FY17 (revised estimates or RE). This freed Rs 16,800 crore. The balance has been met by raising its revenue collection target for FY18 by 7 per cent over the interim Budget. 

The interim one had projected total revenue receipts at Rs 3 lakh crore in FY18, up 11.4 per cent from Rs 2.69 lakh crore in FY17 (RE). This Budget pegs total revenue receipts at Rs 3.19 lakh crore, higher by 18.6 per cent over the previous financial year. By doing so, the government has created additional fiscal space of Rs 19,300 crores. 

These two changes give the fiscal space to finance its Rs 36,000-crore loan waiver, the allocation for which has been made under the department of agriculture.

Also, contrary to fears, the government did not cut the budgeted capital expenditure. Total capex is put at Rs 77,541 crore in FY18, marginally higher than the Rs 76,178 crore in the interim Budget. While this is lower than the capital spending in FY17, the farm loan waiver is not its cause. The interim one had already budgeted for cuts in capex to bring down the state's burgeoning fiscal deficit. Experts are sceptical whether this sharp increase in revenue collection would happen. Non-tax revenue, earlier projected to grow 3 per cent, is now budgeted to grow at 13 per cent. To achieve this, the government has shown grants from the Centre to grow by a staggering 39 per cent to Rs 68,052 crore in FY18. The state’s own non-tax revenue has actually been budgeted to contract this year.

“It is unclear whether the sharp increase in grants from the Centre in the Budget estimates would materialise, in light of the relatively modest growth budgeted by the Government of India in aggregate grants to all states,” says an expert. 

On the tax revenue side, while collections grew by 12 per cent in FY17, the interim Budget had projected a growth of 14.7 per cent in FY18. The government now expects these to grow 20.8 per cent. In large part, this is based on expectations of revenue from sales tax and the goods and services tax to grow 26 per cent in FY18, reveals an analysis by PRS Legislative Research. 

The documents released by the state government on the farm loan waiver says it will apply to small farmers (land less than two hectares) and marginal farmers (less than one ha). It will also cover loans restructured due to occurrence of natural calamities but will exclude crop loans taken by self-help groups, microfinance institutions and urban cooperative banks, term loans, and money withdrawn via the Kisan Credit Card For the purpose of calculating the loan amount, the dues (including interest) as on end-March 2016 would be reduced by repayments received during FY17, without taking into account the money withdrawn by the farmer or new sanctions during FY17.