Within a fortnight of UP's farm loan waiver and calls for the same in other states, a foreign brokerage estimated the burden from such populist measures to touch two percent of GDP by 2019 elections.
Farm loan waivers of up to two percent of GDP in the run up to the 2019 hustings pose fiscal/rate risk and impacts credit culture.Analysts, Bank of America Merill Lynch
They said the Yogi Adityanath government's debt waiver of five billion US dollars or 0.4 percent of the state GDP will lead other states to follow such a populist suit.
Even though the Centre has asked the states to take care of its finances while declaring such schemes, the note said the states would continue to be in breach of the indicative 3-3.5 percent fiscal deficit numbers. Already most of the states are running over the 3.5 percent deficit.
It can be noted that such demands are being made in other states, including Maharashtra, Haryana and Tamil Nadu.
In fact, the Madras High Court ordered the state to write off the entire farm loans in the state which would entail a hit of over Rs 4,000 crore to the state finances.
Terming such measures as a "worry", the note welcomed Reserve Bank Governor Urjit Patel's warning on the farm loan waivers creating a moral hazard by inducing farmers not to pay and also spiking rates.
The American brokerage said the farm loan waivers are a "key risk" to the new fiscal deficit road-map proposed by the NK Singh committee.
Once the demand for credit picks up, such measures can spike yields and put pressure on lending rates as banks will want to lend to high-yielding commercial credit, it said.
It can be noted that the National Bank for Agriculture and Rural Development (NABARD) has also raised a flag on the issue.
The bank also welcomed the provisions to make fiscal deficit number counter cyclical, saying it is on expected lines.
The achievement of fiscal gap numbers – three percent between fiscal 2018 and 2020 and reduction to 2.8 percent in fiscal 2021, 2.6 percent in fiscal 2022 and 2.5 percent in the next year – depends on the global situation.
"If it (global economy) turns up/down, rising/falling tax collections from higher/lower activity will contract/expand the fiscal deficit," it said.
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