Fitch Ratings said loan waiver schemes given out to farmers could have a significant impact on State government finances and prove risky for further fiscal slippages. “The farm loan-waiver schemes being discussed and rolled out across an increasing number of Indian states could have a significant impact on State government finances, and might undermine efforts to bring down general government debt,”Fitch said in a statement.
Uttar Pradesh, Maharashtra, Punjab and Karnataka announced farm loan waivers, undoubtedly giving other states ideas to do the same, especially with the upcoming elections. “There is a risk that farm loan waivers, which we have not precisely factored into our assumptions- will lead to further fiscal slippage at the State level or will reduce the funds available for public investment. The Central government has the authority to block States from borrowing to finance persistently large deficits, but it could be reluctant ahead of approaching elections in some States, with the 2019 Lok Sabha election drawing nearer,” Fitch said.
While the Centre has gradually consolidated its fiscal position in recent years, and has indicated that loan waivers will have to be funded from State coffers, the ratings agency said, “The combined finances of the States - which are included in general government debt and deficits have been under pressure. Public pay hikes, election spending and higher interest costs stemming from the UDAY scheme- under which State governments have taken on debt from power distribution companies, are all likely to add to expenditure.”
“Uniform farm loan waivers could lead to moral hazard and weaken the general repayment culture among financially healthy farmers, but they will still have an incentive to repay loans in order to retain access to future funding.” Fitch said, “The combined cost to the states could also become large this time.”
While affirming India’s rating at ‘BBB-’ with stable outlook in May, Fitch forecast general government debt to fall to 64.9% of GDP by fiscal 2020-21, from 67.9% in fiscal 2016-17, and highlighted that potential changes to India’s fiscal position are a rating sensitivity. Public finances are a key weakness in India’s sovereign credit profile, with general government debt well above the 'BBB' median of 40.9% and the fiscal deficit of 6.6% of GDP in 2016-17 much higher than the ‘BBB’ median of 2.7%. Fitch said banks could also be affected by the waiver schemes.
