Karnataka's farm loan waiver likely to cost the exchequer Rs 250 billion

State government has fiscal space to provide for staggered farm loan write-off

The farm loan waiver announced by B S Yeddyurappa, the newly sworn-in chief minister of Karnataka, might end up costing the state exchequer Rs 250 billion, government officials told Business Standard.

The modalities of the scheme will be worked out in the coming days. The state’s finance department has asked banks to provide data on outstanding crop loans according to the size of the loan and the date on which it was taken to determine the cut-off period. The loan waiver will be capped at Rs 100,000 per beneficiary, as mentioned in the Bharatiya Janata Party’s election manifesto. With the state government in sound financial health, it could finance the loan waiver if it is staggered over a few years, similar to the approach adopted by other states.

Total loans outstanding to the agricultural sector in Karnataka were Rs 1.2 trillion at the end of September 2017, shows data from the state-level bankers’ committee. Of this, 35 per cent was accounted for by three major banks, namely Canara Bank, Syndicate Bank, and State Bank of India. Another 24 per cent was through three regional rural banks and cooperatives, namely Pragathi Krishna Gramin Bank, Karnataka Vikas Grameena Bank, and The Karnataka State Co-Operative Apex Bank.

Of the total credit outstanding, crop loans taken for seeds and fertilisers add up to roughly Rs 600 billion, officials said. The balance consists of term loans for purchase of tractors and for allied activities such as apiculture and poultry.

As past examples of loan waivers have shown, governments tend to typically waive crop loans. State government officials said of Rs 600 billion in crop loans, the waiver would be around Rs 250 billion. “About 30 per cent of farmers have loans outstanding of less than Rs 40,000. For them, the entire loan will be waived,” said an official with the state cooperation department.

To put this farm loan waiver in perspective, consider that in 2018-19, the Karnataka government’s capital outlay on agriculture, animal husbandry, fisheries, rural development, and water resources in 2018-19, is pegged at Rs 159 billion, while the state government’s total capital outlay is pegged at Rs 296 billion. The Rs 250 billion figure is in line with estimates by analysts at the Reserve Bank of India, who had quantified state-wise cost to the exchequer assuming farm loans up to Rs 100,000 were waived. Based on this analysis, if all agriculture loans (crop as well as term loans) in Karnataka are waived, it will cost the exchequer Rs 346 billion. However, if only crop loans are waived then it will cost Rs 214 billion. This analysis was based on data till March 2016.

The state government could issue bonds to finance the waiver, experts said. Karnataka is one of the least leveraged states in India, with its debt to GSDP ratio at 19.25 per cent in 2018-19. The state’s fiscal deficit is budgeted at 2.49 per cent of GSDP in 2018-19, down from 2.7 per cent in 2017-18 (RE).

The state is also not bound by the 3 per cent fiscal deficit limit set by the 14th Finance Commission, which had provided states additional leeway if they met certain conditions related to interest payments and debt level.

“In our estimate, the state will be eligible for additional borrowing of 0.5 per cent of GSDP in 2018-19,” said Jayanta Roy, group head, corporate sector ratings, Icra. This leeway allows Karnataka additional fiscal space of around 1 percentage point of GSDP, which translates to roughly Rs 140 billion. Thus, the state government could stagger the waiver over a few years, following precedents set by other states.

While the waiver could help farmers in the state, experts are worried how such loan waivers are distorting the credit culture in the country. “Farm loan waivers are at best temporary solutions. They are not a long-term response to the crisis facing the agriculture sector. More often than not, loan waivers end up disrupting the credit culture,” said Tajmul Haque, former chairman of the Commission for Agriculture Costs and Prices and chairman of NITI Aayog’s cell on land policy.

“However, given that farmers in Karnataka have been facing difficult times, a loan waiver could be considered as a temporary solution,” he added.

“In the case of Karnataka, the loan waiver is somewhat justified as the state has been suffering back-to-back droughts,” said P K Joshi, South-Asia director of the International Food Policy Research Institute. “It is more a social objective, though there might not be any economic logic behind it,” he added. The previous Congress government had also provided a Rs 82 billion farm debt waiver, capped at Rs 50,000 per farmer.

With inputs from Sanjeeb Mukherjee