Farm Loan Waiver To Dent Maharashtra’s Medium-Term Growth Prospects
Loan waiver will reduce Maharashtra government’s fiscal room for capital expenditure: India Ratings
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The Maharashtra farm loan waiver of Rs 30,000 crore for small and marginal farmers will push up state’s fiscal deficit to 2.71 percent (budgeted: 1.53 percent) in the financial year 2017-18 of gross state domestic product (GSDP) and in order to manage the elevated debt levels the state could reduce expenditure on capital formation, says India Ratings and Research.
India Ratings believes the loan waiver is likely to reduce the fiscal space for the government to undertake higher capital expenditure over the medium-term, thus affecting its medium-term growth prospects.
India Ratings assesses the impact however will depend on whether the entire loan waiver is absorbed this year or is staggered over a period of three to four years.
India Ratings estimates the fiscal deficit will increase by 29.5 basis points to 1.82 percent of GSDP in FY18 if the loan waiver is phased equally (Rs 7,500 crore) over a four-year period. In this scenario, the fiscal deficit/GSDP is estimated to increase by 22-27 basis points over FY19-FY21. However, despite fiscal deficit expansion, it is likely to remain within the 14th Finance Commission’s prescribed limit of 3 percent of GSDP.
India Ratings estimates debt/GSDP to increase to 17.44 percent in the current fiscal year (with entire waived amount absorbed this year) as against the budgeted 16.26 percent.
The state has budgeted debt stock at Rs 4,12,992 crore for FY18. With the loan waiver, this will rise to Rs 4,42,992 crore.
India Ratings believes that the elevated debt levels will raise concern that the state could reduce expenditure on capital formation. The share of capital expenditure in total expenditure averaged 16.6 percent during FY10-FY17 (revised estimate). Deficits in the revenue account persisted during this period due to large interest payments. Interest payment (Rs 34,127 crore) to revenue expenditure ratio is budgeted at 13.75 percent for FY18. The state government has budgeted capex at 15.21 percent of total expenditure in FY18.
This is the second farm waiver announced by a state this year after Uttar Pradesh and farmers in states namely Madhya Pradesh, Punjab and Tamil Nadu are also demanding similar waivers.
Impact On Credit Culture
India Ratings had highlighted in the report ‘Agri Debt Waivers Destroy Credit Culture’ the negative implication that debt waivers have on credit culture. The debt waiver announced can significantly impact the credit culture among the agriculture communities in other states. More importantly demand for debt waiver may also come in from other states as well. The waivers may mask the delinquencies for the time being. Nevertheless, it carries the risk of significantly impairing asset quality going forward. The unintended outcome of this could be reduced availability of credit to the farmers from banks, forcing them to resort to the unorganised lending sector.
India Ratings and Research, a wholly owned subsidiary of Fitch Group, is a SEBI and RBI accredited credit rating agency operating in the Indian credit market.
