{"id":4485,"date":"2019-09-18T21:00:37","date_gmt":"2019-09-18T15:30:37","guid":{"rendered":"https:\/\/triumphias.com\/blog\/?p=4485"},"modified":"2019-09-18T21:00:37","modified_gmt":"2019-09-18T15:30:37","slug":"impact-of-waiving-of-loans-on-states","status":"publish","type":"post","link":"https:\/\/triumphias.com\/blog\/impact-of-waiving-of-loans-on-states\/","title":{"rendered":"Impact of Waiving of loans on states"},"content":{"rendered":"<p><strong>Relevance: Mains: Current Affairs Analysis<\/strong><\/p>\n<p><strong>Why in news?<\/strong><\/p>\n<ul>\n<li>The RBI recently shared the report of an Internal Working Group (IWG) set up to primarily look at the impact of farm loan waivers on state finances.<\/li>\n<\/ul>\n<p><strong>Requirement of IWG<\/strong><\/p>\n<ul>\n<li>A farm loan waiver by the government implies that the government settles the private debt that a farmer owes to a bank.<\/li>\n<li>Since 2014-15, many state governments have announced farm loan waivers for a variety of reasons including relieving distressed farmers.<\/li>\n<li>Farmers were, notably, struggling with lower incomes with repeated droughts and demonetisation.<\/li>\n<li>In this context, the RBI set up the Internal Working Group (IWG) in February 2019 to analyse the impact of farm loan waivers.<\/li>\n<\/ul>\n<p><strong>How have loan waivers been?<\/strong><\/p>\n<ul>\n<li>Once announced, farm loan waivers are staggered over 3 to 5 years.<\/li>\n<li>Between 2014-15 and 2018-19, the total farm loan waiver announced by different state governments was Rs 2.36 trillion.<\/li>\n<li>Of this, Rs 1.5 trillion has already been waived.<\/li>\n<li>In comparison, the last big farm loan waiver by the Centre was announced by the UPA government in 2008-09 and it was Rs 0.72 trillion<\/li>\n<li>Of this, actual waivers were only Rs 0.53 trillion, staggered between 2008-09 and 2011-12.<\/li>\n<li>In other words, in the past 5 years, just a handful of states have already waived three-times the amount waived by the central government in 2008-09.<\/li>\n<li>The actual waivers peaked in 2017-18 in the wake of demonetisation and its adverse impact on farm incomes.<\/li>\n<li>It amounted to almost 12% of the states\u2019 fiscal deficit.<\/li>\n<\/ul>\n<p><strong>Waivers affect state finances<\/strong><\/p>\n<ul>\n<li>Farm waivers eat into the government\u2019s resources, which, in turn, leads to one of the following two things: the concerned government\u2019s fiscal deficit (or, in other words, total borrowing from the market) goes up; and government has to cut down its expenditure.<\/li>\n<li>Even at the state level, a higher fiscal deficit implies that the amount of money available for lending to private businesses (big and small) will be lower.<\/li>\n<li>It also means the cost at which this money would be lent (interest rate) would be higher.<\/li>\n<li>If fresh credit is costly, in turn, there will be fewer new companies and less job creation.<\/li>\n<li>So, if the state government does not prefer borrowing from the market and wants to keep to its fiscal deficit target, it will be forced to cut expenditure to manage.<\/li>\n<li>More often, states choose to cut capital expenditure instead of the revenue expenditure.<\/li>\n<li>[Capital expenditure is that which leads to the creation of productive assets such as more roads, buildings, schools etc.<\/li>\n<li>Revenue expenditure is in the form of committed expenditure such as staff salaries and pensions.]<\/li>\n<li>The point to note is that cutting capital expenditure undermines the ability to produce and grow in the future.<\/li>\n<\/ul>\n<p><strong>How significant are state finances?<\/strong><\/p>\n<ul>\n<li>The National Institute of Public Finance and Policy (NIPFP) study of state finances reveals that all the states, collectively, now spend 30% more than the central government.<\/li>\n<li>Moreover, since 2014, state governments have increasingly borrowed money from the market.<\/li>\n<li>In 2016-17, the total net borrowings by all the states were almost equal (roughly 86%) of the amount that the Centre borrowed.<\/li>\n<li>In other words, state-level finances are as important as that of the centre\u2019s for India\u2019s macroeconomic stability and future economic growth.<\/li>\n<\/ul>\n<p><strong>Way forward<\/strong><\/p>\n<ul>\n<li>Farm loan waivers are not advisable as they hurt overall economic growth apart from ruining the credit culture in the economy.<\/li>\n<li>This is because they incentivise defaulters and penalise those who pay back their loans.<\/li>\n<li>The IWG thus recommends that central and state governments should undertake a holistic review of the agricultural policies and their implementation.<\/li>\n<li>They should also evaluate the effectiveness of current subsidy policies with regard to agri inputs and credit.<\/li>\n<li>This should be towards improving the overall viability of agriculture in a sustainable manner.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Relevance: Mains: Current Affairs Analysis Why in news? The RBI recently shared the report of an Internal Working Group (IWG)<\/p>\n","protected":false},"author":1,"featured_media":4359,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[123,42,43],"tags":[392],"class_list":["post-4485","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-current-affairs","category-general-studies-iii-technology-economic-development-bio-diversity-environment-security-and-disaster-management","category-indian-economy","tag-union-public-service-commission-upsc"],"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/4485","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/comments?post=4485"}],"version-history":[{"count":1,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/4485\/revisions"}],"predecessor-version":[{"id":4486,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/4485\/revisions\/4486"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/media\/4359"}],"wp:attachment":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/media?parent=4485"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/categories?post=4485"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/tags?post=4485"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}