Farm Loan Waivers Are A Risk To Fiscal Consolidation, Says Fitch
The combined federal and state government debt was at 67.5 percent of GDP in 2016.
Increase in demands for farm loan waivers across various Indian states could have an significant impact on state governments’ finances, and might undermine efforts to bring down debt, says Fitch Ratings.
The credit rating agency expects that larger state deficit would delay an expected gradual reduction in government debt.
The combined federal and state government debt was at 67.5 percent of GDP in 2016, according to Moody’s Investors Service. It rates India “Baa3”.
While affirming India’s rating at 'BBB-' with stable outlook in May, Fitch forecast general government debt to fall to 64.9 percent of GDP by financial year 2020-21, from 67.9 percent in 2016-17, and highlighted that potential changes to India’s fiscal position are a rating sensitivity.
There is a risk that farm loan waivers which we have not previously factored into our assumptions will lead to further fiscal slippage at the state level or will reduce the funds available for public investment.Fitch Ratings Report
The Cabinet on Wednesday approved higher allowances for central government employees based on the Seventh Pay Commission recommendations, a move that will cost the government Rs 30,748 crore. The government also has debt from power distribution companies for Ujwal DISCOM Assurance Yojana (UDAY) scheme which are likely to add to expenditure.
Over nine years to March 2017, the central and state governments have waived of Rs 88,988 crore in loans to 4.3 crore farmers, it has reportedly cost around 1.3 percent of GDP, and it is expected that the combined cost to the state could also become large this time.
As farm-loan waivers have been already announced in Punjab, Madhya Pradesh, and Karnataka after Uttar Pradesh and Maharashtra, other governments are likely to feel pressure to implement similar policies, the report said.