Surging farm loan waivers will cut GDP by 1.1 lakh crore; set to reduce farmer suicides

Surging need for the states to provide farm loan waivers is expected to cut GDP by 1.1 lakh crore from growth however it will cheer the farmers in stress, according to the second volume of the Economic Survey tabled in Parliament on Friday.

Growing farmers' debt driven by poor monsoon, inadequate distribution of rainfall, or natural calamity, every year adds more distress to the farming profession. The survey pointed out that loan waivers will increase net worth of farm households. Aggregate increase in income will be 28 percent and 7 percent in consumption.

However, the aggregate demand, in the economy could reduce 0.7 percent and will result in higher borrowing by states with fiscal space, which could squeeze out private funding. States which benefit from fiscal help for loan waiver will add about Rs 6,350 crore to demand, but states that have very scanty access to the fiscal room will reduce demand approximately by Rs 1.9 lakh crore, Economic Times reported.

However, that is the predicted impact. According to the survey, the actual impact will depend on the number of states that actually decide to grant waivers and how they decide to distribute them over time.

Farm loans, falling profitability or inactive power plants will increase debt and add further to the stress of the commercial banks. Declining private consumption and higher borrowing by the states could affect the aggregate demand. Monetary, fiscal and agricultural policies will be the primary focus to encounter deflationary impulses in the year ahead, the survey added.

The first volume of the economic survey also showed that achieving 7.5 percent GDP growth in the fiscal year 2018 will be difficult.

What is a farm loan waiver?

Farmers take loans for crops or investment loans to buy farm equipments. When monsoons are good, both farmers and banks reap profits. But, when farmers receive scanty rainfall or face any natural calamity such as floods, many farmers fail to repay loans. In such situations, States or the Centre steps in to provide relief through reduction or complete waiver of loans.

So, the Centre or the States take over the farmers' liability and repay the banks. Loan waivers provide some short term relief to farmers in such distress but also make a sharp dent in the finances of the government.

Loan waiver-Measure to prevent farmers' suicide

About 60 percent of the population in India still depends on farming. According to a government data, about 855 cases of farmer suicides were recorded in Maharashtra during January-April period this year.

Although, the numbers reported showed a significant decline from the previous year's, the concern still remains. The government is still taking several measures to address the issue of farmer suicides in the country. Failure to repay debts is one of the major reasons why farmers are deciding to end their lives.

Farm loan waiver, although will add some support, but it might not be enough, reports state.

"Farm loan waiver is a good tool but it is becoming a part of electoral politics," said Shamika Ravi, senior fellow at Brookings Institution in an interview with ET Now.