Farm loan waivers by seven state governments totalling almost Rs 88,000 crore may raise India's retail inflation by around 20 basis points (bps), according to a paper by the Reserve Bank of India (RBI).
"Loan waivers could add to the fiscal burden over the medium term as they are essentially a transfer from taxpayers to borrowers," the paper said.
Farm loan waivers have been announced by both the central and state governments to provide relief to farmers facing distress due to natural calamities/crop failure, reported the Hindustan Times (HT).
The Mint Street Memo (MSM) was authored by members of RBI's Monetary Policy Department and Department of Economic and Policy Research.
"The relationship between fiscal deficit and inflation in India was such that at higher levels of fiscal deficit, the impact on inflation is greater," the report suggested.
During the April-March period of the current fiscal, the combined fiscal deficit rose 40 bps due to farm loan waivers, while inflation could rise permanently by around 20 bps.
"Based on stylised assumptions, the total loan waiver amount that is likely to be released in 2017-18 by seven states is around Rs 881 billion. Depending on possible sources of financing, the additional burden... may result in an increase in the consolidated Gross Fiscal Deficit-Gross Domestic Product ratio of the states by about 20-40 bps," the paper stated.
Earlier in June, RBI has raised concerns at what is financially imprudent, though politically rewarding. The issue is waiver of farm loans running into thousands of crores owed by lakhs of farmers.
MSM are in the form of brief reports and analysis on contemporary topics, prepared by the staff of RBI and Centre for Advanced Financial Research and Learning (CAFRAL), or drawn from one of the recent publications of the Bank, HT reported.
Andhra Pradesh and Telangana had announced farm loan waiver in 2014; Tamil Nadu in 2016; and Uttar Pradesh, Maharashtra, Punjab and Karnataka in 2017.
Earlier Uttar Pradesh said it will waive off loans of small and marginal farmers to the tune of Rs 36,000 crore, while Maharashtra and Karnataka have announced waiver of farm loans worth Rs 42,100 crore. Punjab has also said it will waive crop loans for small and marginal farmers, and has provided Rs 1,500 crore for the purpose in its budget for fiscal 2018.
The RBI paper also said that the quantum of waiver being contemplated by other states ranged between Rs 40,000 to 57,000 crore. Another RBI staff paper, also released on Monday, estimated the total size of farm loan waivers at around Rs 2.2 lakh crore should all crop loans of small and marginal farmers be waived. However, this amount could rise to as high as Rs 4.2 lakh crore if all agricultural loans are waived. But the staff paper said the second scenario was less likely.
The father of India's Green Revolution, M S Swaminathan had earlier said that farm loan waivers are only a "temporary necessity" to address the agricultural crisis in the country and not a permanent solution to the problem.
