Farm debt waivers may lead to 20-bp permanent rise in inflation

A study by the Reserve Bank of India (RBI) staff says that if the combined fiscal deficit of the states on account of farm debt waivers goes up by 40 basis points to 5.9 per cent of gross domestic product, there could be around a 20-basispoint permanent increase in inflation, starting 2017-18.

One basis point is a hundredth of a percentage point.

This is not the official view of the RBI, but of some of its research staff, but the central bank has been warning about the impact of farm debt waivers on inflation and interest rates.

RBI Governor Urjit Patel in a recent speech said farm debt waivers eventually pushed up interest rates for the whole economy.

The recent spate of farm debt waivers, starting 2014, has reached ~1.3 lakh crore and more states are due to announce their versions of waivers.

The RBI staff study estimates other states could end up waiving another ~40,000-57,000 crore of farm loans in all.

In 2017-18 itself, the loan waiver amount likely to be released would be around ~88,100 crore, the staff study estimated, which would be 0.5 per cent of gross domestic product.

This may lead to additional market borrowing, and pruning wasteful expenditure, and, as result, the consolidated gross fiscal deficit may rise by 20-40 basis points.

“Higher fiscal deficits per se can lead to an increase in inflation expectations and actual inflation,” said the study’s authors Pratik Mitra, Indranil Bhattacharyya, Joice John, Indrani Manna, and Asish Thomas George.

Furthermore, “state government farm loan waivers have the potential to crowd out corporate borrowings if financed through SDL (state development loans) issuance,” the study said.