Farm-loan Waivers may cut GDP by .₹ 1.1 Lakh Cr

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New Delhi: In­creas­ing trends of states dol­ing out farm loan waivers could re­duce ag­gre­gate de­mand in the econ­omy by as much as 0.7%, shav­ing off .₹ 1.1 lakh crore from GDP, the sec­ond vol­ume of the Eco­nomic Sur­vey tabled in Par­lia­ment on Fri­day warned. This, it said, would im­part a sig­nif­i­cant de­fla­tion­ary shock to an econ­omy that has yet to gather its full mo­men­tum.

But the pre­dicted im­pact is the up­per limit, as the es­ti­mate is based on the as­sump­tion that states that have not an­nounced loan waivers will do so. “The ac­tual im­pact will de­pend on the num­ber of states that ac­tu­ally de­cide to grant waivers, and how they dis­trib­ute them over time,” the sur­vey said.

Ac­cord­ing to the sur­vey, it was as­sumed that other states could fol­low the UP model. “On this ba­sis, an up­per bound of loan waivers at the all-In­dia level would be be­tween .₹ 2.2 lakh crore and .₹ 2.7 lakh crore,” it said.

Farm loan waivers and de­clin­ing prof­itabil­ity in the power and tele­com sec­tors would ex­ac­er­bate the twin bal­ance sheet prob­lem — over­lever­aged com­pa­nies and the pile up of bad debt at banks — and weigh on the econ­omy, the sur­vey said. A re­duc­tion in pri­vate con­sump­tion and higher bor­row­ings by states, among oth­ers, could af­fect ag­gre­gate de­mand. Mon­e­tary, fis­cal and agri­cul­tural poli­cies will be the key to counter th­ese de­fla­tion­ary im­pulses in the year ahead, it added.

Ac­cord­ing to the sur­vey, the waivers will af­fect the ag­gre­gate de­mand in four ways: im­pact on pri­vate con­sump- tion via in­creases in pri­vate sec­tor net wealth, im­pact on the pub­lic sec­tor via changes in gov­ern­ment expenditure or taxes, crowd­ing out im­pact via higher bor­row­ings by state gov­ern­ments and crowd­ing in im­pact via higher credit avail­abil­ity as bank NPAs fall.

“Loan waiver will in­crease net wealth of farm house­holds,” the sur­vey said. Ag­gre­gate in­crease in in­come, it es­ti­mates, will be 28%, and 7% in con­sump­tion — or .₹ 55,000 crore.

States with fis­cal room for loan waiver will add about .₹ 6,350 crore to de­mand, while those that don’t have the space will re­duce de­mand by about .₹ 1.9 lakh crore, the sur­vey es­ti­mated.

Analysing the crowd­ing out im­pact, it said loan waiver will re­sult in higher bor­row­ing by states with fis­cal space, which could squeeze out pri­vate fund­ing. How­ever, bank bal­ance sheets will im­prove inas­much as non-per­form­ing farm loans are taken off their books. “So they might be able to pro­vide ad­di­tional fi­nan­cial re­sources to the pri­vate sec­tor, lead­ing to greater spend­ing. It is es­ti­mated that th­ese two ef­fects would al­most can­cel each other.”

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