Farm loan waiver: Why economy will have 'sleepless' nights

NEW DELHI: In a country where 93% of Indians are sleep deprived — sleeping for less than 8 hours a day — Congress President Rahul Gandhi's threat to not let Prime Minister Narendra Modi sleep till farm loans are written off, may or may not impact the PM's REM pattern but will surely cause 'sleepless' nights and days for the economy.
Like a flu: Following the decision in Madhya Pradesh and Chhattisgarh by their respective chief ministers Kamal Nath and Bhupesh Baghel to waive farm loans, of up to Rs 2 lakh in MP and Rs 6,100 crore for 16 lakh farmers in Chhattisgarh, Assam has also clambered onto the waive-wagon, announcing its decision to write off Rs 600 crore of farmers' loans, which will benefit 8 lakh farmers.Today, Rajasthan became the fourth state this week to write off farm loans.


Damn the economy: The RBI, in a report on state finances in July, had cautioned against the propensity of waiving loans as they were increasing the fiscal deficits of the states, which were facing a double whammy of lower GST revenues — there has been an increase of 0.05% in the fiscal deficit as a percentage of GDP, from 0.27% to 0.32% in the last financial year. This was, in fact, the second time the RBI red-flagged farm loan waivers — it had also earlier done so in 2017. Given the proximity to the 2019 Lok Sabha polls, there are valid fears that the waiver mania may result in fiscal deficit touching 2% of the GDP.


Self-inflicted wound: Farm loan waivers have also resulted in a spike in banks' NPAs, in the agricultural sector as well as pushing the farmers into borrowing from money lenders at an exorbitant interest rate — that's because banks become wary of lending to farmers fearing loan write-offs by the government, which reduces sources of credit for the farmers who are then forced into borrowings from informal sources of finance.