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बेसिक इंग्लिश का दूसरा सत्र (कक्षा प्रारंभ : 22 अक्तूबर, शाम 3:30 से 5:30)
Q. Farm loan waivers disrupt credit discipline: Discuss the impact of farm loan waiving on economy.
Jun 27, 2017 Related to : GS Paper 3

Ans :

Introduction-

Farm loan waivers are “populist actions” and lead to disruption of credit discipline among borrowers. Frequent occurrence of such populist actions may lead to “risks of impaired credit discipline and weak risk-reward for banks” and reduced credit availability for borrowers. Moreover, public banks face greater impact than private banks because of these loan waivers.

Impact:

  • the Centre has stuck to the path of fiscal rectitude hitherto. The states have not, and they account for nearly 60% of the combined expenditure of the Centre and the states. Their borrowings have been rising at a rate close to 30%.
  • Their fiscal deficit for 2016-17 was 2.8% of GDP. This is likely to go up further this year, apart from farm loan waivers. Stamp duty is stagnant and oil prices do not offer much scope for buoyancy.
  • The Uday bonds, reflecting the wages of past sin in the power sector, have to be serviced. The first quarter growth has been impacted by demonetization and the impact of GST on production and revenue for the states’ own revenue is unpredictable, although the Centre is duty-bound to compensate the states for any loss. A combined farm loan waiver of Rs1.25 lakh crore would raise about 0.75% of the likely 2017-18 GDP to the states’ fiscal deficit. 
  • The higher borrowings to finance loan waivers would shrink room to fund public investment, affecting growth. Winning elections is important for politicians. At any cost is their motto. Only an informed public discourse that sees through the trade-offs politicians make can act as a restraint.

Conclusion:

The impact of farm loan waivers announced by states like Uttar Pradesh and Maharashtra could be staggered over a period of more than a year, if past experience is anything to go by. So the financial impact of such measures could also be spread over some years and not restricted to one fiscal, which means fiscal deficit of these states in 2017-18 may not worsen to the extent as feared. In fact, the loan waiver by the UPA government in 2008 took 2.5 years from announcement to get completed, and was eventually 27% smaller than the initial estimate of 71,700 crore, according to Credit Suisse.


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