Ind-Ra: UP Farm Debt Waiver - Not a Long-Term Solution to Agrarian Distress, to Pressurise State Finances

The debt waiver announced by the Uttar Pradesh (UP) government for the small and marginal farmers is not the long-term answer to any agrarian crisis, says India Ratings & Research (Ind-Ra). While the solution to the agrarian crisis facing the country is not an easy one, providing a debt waiver to farmers will only provide short-term relief to distressed farmers, but will also lead to a bad credit culture, besides exerting pressure on state finances.

The UP cabinet has waived agriculture loans up to INR100,000 of 21.5 million small and marginal farmers of the state. This is expected to cost the state exchequers INR307.29 billion. In addition the cabinet has also approved a write-off of INR56.30 billion of non-performing assets of 0.7 million farmers. Ind-Ra estimates that the direct impact of the debt waiver on the state exchequer to be around INR363.59 billion, which is around 2.6% of UP's gross state domestic product (GSDP).

 

Despite being under pressure, the finances of the government of UP (GoUP) are in relatively better shape than it was a decade ago. The state has been generating revenue surplus from FY07 onwards. It had shown revenue surplus of INR223.94 billion in FY15, INR183.68 billion in FY16 (revised estimate, RE) and INR282.01 billion in FY17 (budget estimate, BE). Also the fiscal deficit/GSDP of the state (excluding UDAY scheme) in FY16 (RE) and FY17 (BE) was lower than the 14th Finance Commission's prescribed limit of 3%. The state spends a significant part of its expenditure on the power sector (both revenue and capital). 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. However, Ind-Ra would await the GoUP's FY18 budget to ascertain the fiscal position of the state.

Ind-Ra had highlighted the negative implication that debt waivers have on credit culture. The debt waiver announced can significantly impact the credit culture among the agriculture communities in other states. More importantly demand for debt waiver may also 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.

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