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The economics of farm loan write-offs; Will Yogi Adityanath walk the talk on Tuesday?

Uttar Pradesh Chief Minister Yogi Adityanath will chair the new government’s first cabinet meeting on Tuesday amid heightened expectations that a farm loan waiver scheme will be approved, signalling the government’s intent to walk the talk on a key poll promise.Mcx crude tips
Uttar Pradesh Chief Minister Yogi Adityanath will chair the new government’s first cabinet meeting on Tuesday amid heightened expectations that a farm loan waiver scheme will be approved, signalling the government’s intent to walk the talk on a key poll promise.
The scheme, if approved, will likely bring cheer to about 10 million (one crore) small and marginal farmers in India’s most populous state, but could test the newly elected government’s dexterity on fiscal management.
By most accounts, the UP government’s announcement will probably be second only to the UPA government’s big-bang farm loan waiver and debt relief scheme brought cheer to 42.8 million farmers across the country, but cost the central exchequer more than Rs 70,000 crore.Agri tips
The newly elected Amarinder Singh-led Punjab government will also keenly watch UP’s farm loan model to implement its own loan write-off scheme promised during the state elections.
According to a recent State Bank of India (SBI) research report, the loan waiver plan for Uttar Pradesh will cost the state government Rs27,419.70 crore, accounting for nearly 8 percent of its revenues.
The state government will reimburse banks for writing off these loans, in a manner similar to the UPA government’s 2008 scheme, but could upset the state’s fiscal math if tax revenues do not gather pace.
The state government will also have to take extra care that only eligible borrowers get the relief.
The cut-off date for loan waiver eligibility will also need to be carefully chosen. In the 2008 scheme all direct agricultural loans, including crop loans and investment credit for agriculture and allied activities including tractor loans given to farmers over a ten year period –from March 31, 1997 and March 2007 (which have remained unpaid till February 2008)— was covered.Stock Cash tips
Will the UP government chose a similar range of 10 years for waiving farm loans?
While eligible farmers would be debt free immediately, the government will likely have to set a timeline approved by the state legislature for reimbursing banks that will write off the loans.
There could be other unanswered questions. What documents will farmers be required to submit to demonstrate their eligibility for loan waiver?
In 2008, farmers were not required to submit any documents. Instead, they received a certificate from their banks with the details of loan waiver. The Centre, in its capacity as the majority owner of public sector banks, had asked bank branch to prepare an eligible farmers’ list, along with the outstanding loan amount to enable quick disbursal of cases.
In the case of a state government-initiated loan waiver scheme, the line of communication to banks may have to be routed through the Centre (since these are public sector banks) and the Reserve Bank of India (RBI) in its capacity as the banking regulator.
Also, will the UP government standard definitions of small farmers (those who have a land holding of up to one hectare (2.5 acres), and marginal farmers (those with land holding between 1-2 hectares)?
What happens to farmers with a land holding of over two hectares? In 2008, the Centre gave a one-time settlement (OTS) offering a rebate of 25 percent of their outstanding loans subject to the condition that the balance 75 per cent is paid in three installments within a year. Will the UP government offer a similar treatment?
Economists and bankers loathe the idea of state-sponsored loan write-offs as these create a perverse incentive, distorts the loan market and puts a premium on defaults.
SBI Chairman Arundhati Bhattacharya had recently cautioned that farm loan waiver will disrupt credit discipline among borrowers.
“Money will come in today because government will pay but when we will give loan in future, farmers will wait for next elections. Support to the farmers is necessary but not at the cost of credit discipline,” Bhattacharya had said.
For the new state government and policy makers, the real challenge, indeed would be to balance the books without cutting down on development expenditure, the broad theme upon which the BJP rode a landslide victory in the Assembly polls last month.
UP’s annual budget or government spending plan for 2016-17 was Rs 3,46,935 crore, 14.60 percent greater than the previous year.
In 2016-17, the state’s budgeted estimates for revenue receipts stood at Rs 2,06,894 crore from taxes, of which Rs 1,05,637 crore came from UP’s share in central taxes.
The budgeted fiscal deficit, a measure of how much the government needs to borrow to meet its spending needs, stood Rs 49,960 crore in 2016-17 or 4.04 percent of the gross state domestic product (GSDP).
The new state administration will have to ensure that the government does not end up borrowing more to fund the loan waiver scheme.
The rollout of goods and services tax (GST) could help bolster the state’s revenues. GST, by definition, is a “destination”-based levy, implying that tax is collected at the place of consumption or the final point of sale.
Most analysts expect the so-called “consuming” states like UP and Bihar to gain in revenues after GST kicks in.
In any case, all states will be fully compensated for upto five years for any revenue loss after moving into the new system. Under the compensation formula, 2015-16 will be taken as the base year for calculating revenue assuming a secular or long-term growth rate of 14 percent.
The new UP administration will be hoping that GST will result in higher than 14 percent growth in revenues for state, allowing the government more elbow room to fund loan waiver and other welfare schemes.
By most macro metrics, UP has been a growth laggard.
Between 2005 to 2015 Uttar Pradesh’s “real” or “inflation-adjusted” state gross domestic product grew at an average of 6.5 percent compared to an all-India average of 7.75 percent.
In 2015, Uttar Pradesh’s per capita in current prices stood at Rs 40,373 compared to the all-India average of Rs 78,000. Despite the scorching annual GDP growth rates over the last 10 years, the average income of a person in Uttar Pradesh is still less than half of the average Indian.
Uttar Pradesh also compares poorly against its other BIMARU peer group states. The per capita income of Rajasthan was Rs 72,156 (in 2014-15), while a person living in Madhya Pradesh earned an average income of Rs 59,770 in 1024-15 UP also lags Chhattisgarh (per capita income of Rs 64,442) and Jharkhand (per capita income of Rs 52,147). UP’s per capita income is actually less than a third of the so-called “industrialised” states such as Gujarat and Maharashtra.
Quick decision-making, elimination of procedural red-tape and focus on job-intensive sectors like roads can help the economy canter close to the leading states.