"The debt waiver for the small and marginal farmers (in UP) is not the long-term answer to any agrarian crisis. It will only provide short-term relief to distressed farmers, but will also lead to a bad credit culture, besides exerting pressure on state finances," said the report by India Ratings & Research (Ind-Ra).
The BJP-led government in UP has waived agriculture loans up to Rs 1,00,000 of 21.5 million small and marginal farmers. This is expected to cost the state exchequer Rs 307.29 billion. In addition, the government has approved a write-off of Rs 56.30 billion of non-performing assets of 0.7 million farmers.
Despite being under pressure, the finances of the UP government are in relatively better shape than the situation a decade ago. The state has been generating revenue surplus from FY07 onwards. It had shown revenue surplus of Rs 223.94 billion in FY15, Rs 183.68 billion in FY16 and Rs 282.01 billion in FY17, the report said.
The state spends a significant part of its expenditure on the power sector. As UP was the first state to join UDAY and has also raised bonds from the market for financing the losses of the power sector, Ind-Ra believes this will provide some fiscal space for the government to absorb the expenditure arising out of the farm debt waiver.
Ind-Ra said the UP debt waiver can significantly impact the credit culture among the agriculture communities in other states. More importantly, demand for debt waiver may come in from other states as well.
The waivers may mask the delinquencies for the time being. Nevertheless, it carries the risk of significantly impairing asset quality going forward. The unintended outcome of this could be reduced availability of credit to the farmers from banks, forcing them to resort to the unorganised lending sector, it said.