Survey backs U.P. model on farm loan waivers

‘Impact could lower demand by as much as 0.7% of GDP’

The Economic Survey assumes that other States will follow Uttar Pradesh’s example and waive farm loans, taking the full waiver amount to ₹2.2-2.7 lakh crore, according to the second portion of the survey released on Friday.

The Survey’s own calculations find that only a few States have the fiscal space for such waivers, and so most will have to either cut expenditure or increase taxes. The total impact of waivers could be to lower demand by as much as 0.7% of the GDP, it said.

“It is assumed that waivers will apply at the loan rather than household level, since it will be administratively difficult to aggregate loans across households,” Volume 2 of the Economic Survey, tabled in Parliament, said. “It is also assumed that other States will follow the U.P. model [of waivers up to ₹1 lakh for all small and marginal farmers]. On this basis, an upper bound of loan waivers at the All-India level would be between ₹2.2 and ₹2.7 lakh crore.”

Four effects

The Survey says the waivers will have four effects on aggregate demand: on private consumption impact via increases in private sector net wealth, public sector impact via changes in government expenditure/taxes, crowding out impact via higher borrowings by State governments, and crowding in impact via higher credit availability as bank NPAs fall.

“Loan waivers will increase the net wealth of farm households,” the report said. “Since loan waivers are assumed to increase aggregate income by 28%, consumption is estimated to increase by 7% or about ₹55,000 crore.”

The Survey estimated that for States with fiscal space, loan waivers would add about ₹6,350 crore to demand via the additional interest costs and for States without space, waivers could reduce demand by about ₹1.9 lakh crore.

The Survey’s calculations show that while Andhra Pradesh, U.P, Rajasthan, Himachal Pradesh, Kerala, Odisha, and Chhattisgarh have no fiscal room to waive farm loans, States such as Maharashtra, West Begal, Karnataka and Gujarat have ample space.

[“Source-thehindu”]