Farm loan waiver amounting to Rs 88,000 crore, likely to be released in 2017-18 by seven states including Uttar Pradesh and Maharashtra, may push inflation up by 0.2 percent on permanent basis, said a Reserve Bank of India paper.
If the combined fiscal deficit goes up by 40 basis points due to farm loan waivers, and inflationary momentum remains benign, then this may lead to around 20 basis points of permanent increase in inflation, starting 2017-18, said the Mint Street Memo by RBI.
In India, farm loan waivers have been announced intermittently by both the central and state governments to provide relief to farmers facing distress due to natural calamities or crop failure.
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.
"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 (0.5 percent of Gross Domestic Product, GDP)," it said.
It is also pertinent to note that random fiscal policy shocks, such as loan waivers, have an enduring impact on market borrowings, as evident from past episodes of such waivers.RBI Mint Street Memo
Andhra Pradesh and Telangana had announced farm loan waiver in 2014. Tamil Nadu followed in 2016. Later in 2017, Uttar Pradesh, Maharashtra, Punjab and Karnataka too announced full or partial loan waivers.
Mint Street Memos (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.