Urjit Patel-led MPC raises concerns over farm loan waiver by states

NEW DELHI: The Reserve Bank of India ( RBI) on Wednesday raised alarm over the announcement of large farm loan waivers by states, saying this may jeopardise fiscal discipline.

In its policy review, the central bank said the risk of fiscal slippages, which, by and large, can entail inflationary spillovers, has risen “with the announcements of large farm loan waivers.”

The RBI noted that global political and financial risks materialising into imported inflation and the disbursement of allowances under the 7th central pay commission’s award were a few upside risks to inflation.

CHANGES IN RBI POLICY RATES SINCE 2001

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Maharashtra Chief Minister Devendra Fadnavis recently announced a farm loan waiver of Rs 30,000 crore, the biggest such write-off for farmers in the state.

In April, UP government, led by Yogi Adityanath had waive off agrarian loans worth Rs 36,359 crore of nearly 87 lakh small and marginal farmers in Uttar Pradesh.

“Noting that inflation has fallen below 4 per cent only since November 2016, the MPC remains focused on its commitment to keeping headline inflation close to 4 per cent on a durable basis keeping in mind the output gap,” RBI said.

With the stage set for 2019 general elections, it will all come down to ‘Bharat’ or rural India that will be the key focus area for the government in the next two years.

States are all set to come up with farm waivers, which may go into billion, with foreign brokerage Bofa-ML estimating it to be as huge as $40 billion.

In its latest report, the brokerage said that it is growing more confident of its call that farm loan waivers will spread across states after Maharashtra waived Rs 30,000 crore farm loans on Saturday.

The brokerage believes that these waivers would eventually account for 2 per cent of India’s GDP at $40 billion. This will cover bank loans to farmers with up to 5 acres of land, it said.

“We assess that the MoF will eventually have to come up with a UDAY bond-type solution that will securitise banks' farm loans into long-dated non-SLR state government paper,” Bofa-ML said, adding, it will surely impact the credit culture of the counter, even as it believes that a good part of farmer debt arose on rural stress from poor harvests.

The central bank on Wednesday projected inflation in the range of 2-3.5 per cent in the first half of the ongoing financial year and 3.5-4.5 per cent in the second half.