Memo to Venkaiah Naidu: Loan waiver didn't become a fashion overnight; Centre must share the blame too

Taking cues from his cabinet colleague Arun Jaitley, Union urban development minister M Venkaiah Naidu too has joined the club of those warning against the farm loan waiver spree, now spreading fast across the country, Karnataka being the latest state . “Loan waiver has become fashion now. It should be waived but in extreme situations only. It’s not a final solution. You have to take care of systems. The farmers should be taken care in distress,” Naidu said on Thursday. A while ago, Jaitley too had distanced himself from state-sponsored loan waivers, saying the centre wouldn’t share the burden of the waivers and states will have to fend for themselves. Both Naidu and Jaitley are bang on their stance against the idea of loan waiver. But their words lack conviction for the simple reason that the Narendra Modi-government failed to foresee the crisis in the beginning itself. It should have paid much closer attention to India’s rural agrarian economy and act early before it becomes a full blown crisis. A series of farm loan waivers are nothing short of a crisis situation as it a) destroys credit culture, the impact of which will last for years, b) put immense burden on government exchequer, and c) breaks the back of bank balance sheets. Secondly, Naidu must not forget that it was none other than Prime Minister Narendra Modi who sowed the seeds of a series of loan waiver demands across the country by promising one for Uttar Pradesh farmers in the run-up to the elections. Essentially acting on PM’s words, Yogi Adityanath government announced Rs 30,000 crore waiver and dragged more states like Maharashtra, Madhya Pradesh, Punjab and Haryana to deal with similar demands. [caption id=“attachment_2447710” align=“alignleft” width=“380”]  Venkaiah Naidu AFP[/caption] The loan waiver virus has already begun infecting the credit culture in many states with farmers stopping repayments ( read here ). This exercise is also building another round of bad loan bomb on the balance sheets of public sector banks, which are already struggling to get rid of the existing stock of bad loans. According to IndiaSpend - a data journalism initiative_,_ the total chunk of farm loan waivers could work out to the tune of Rs 3.1 lakh crore or 2.6 percent of the country’s gross domestic product (GDP) in 2016-17. Modi and his top ministers who form the decision-making body in the government on national affairs, thus, cannot escape the responsibility of triggering the current round of loan waivers. They have to take the blame and come out with solutions to contain the crisis. On the part of government, it was a clear failure to learn from the past as this writer too has pointed out in an earlier article . In a recent note, the State Bank of India group chief economic advisor, Soumya Kanti Ghosh said:  “Apart from impacting asset quality for the Agricultural sector (return to trend growth may get delayed by 4 years), farm loan waiver will impact State finances (i.e. State fiscal deficits) adversely. The impact on Punjab will be maximum, with state fiscal deficit jumping by an additional 4.8% of GSDP. We thus believe that states will make provisions of farm loan waiver in their budgets in multiple years,” Ghosh said. But, surprisingly, Ghosh concludes saying the current round of farm loan waiver however “has a positive aspect unlike the earlier ones.” Ghosh’s rationale is that states, which have announced the waivers, have done so only up to a specified threshold limit (mostly Rs 1 lakh), and any amount over that will have to be paid. Hence, “we can expect that there may not be a significant worsening of credit culture and hence we can get back quickly to trend growth for the Agri sector.” Ghosh’s logic of credit culture remaining intact when states stick to loan limits to waiver loans is fundamentally wrong. People don’t typically look at the specifics of the deal when farm loan waiver announcements are done and stop paying the very moment an influential politician announces as a loan waiver, regardless of their loan amount and nature of loans. “During the 2008 waiver by UPA, we had to face pressure even from gold loan borrowers who too claimed eligibility for loan waiver,” said a senior banker who till recently used to head the rural business division of a large state-run bank based in Mumbai. He cited evidence of the aftermath of the UPA-sponsored Rs 70,000 crore farm loan waiver. The Modi government has failed to formulate a comprehensive package to deal with farm distress in the beginning itself. It should have foreseen the approaching situation after two consecutive years of drought. The Tamil Nadu farmers protest in the national capital early this year should have offered a clue to the centre about similar agitations across states. Right now, the situation is far too difficult to handle since a few large state governments have already announced the waiver and it is only a matter of time before others too join with similar requests. The impact on the fiscal health of state governments will further delay their march to lower fiscal deficit targets and even put pressure on them to delay essential spending. For instance, there are already reports of Maharashtra delaying payment of 7th pay panel arrears to 19 lakh state government staff by a year on account of the fiscal impact of the farm loan waiver it has committed to. The point here is this: The centre cannot wash its hands off the farm loan waiver spree since its inaction and the PM’s political promises too are to be blamed for the situation escalating to the current proportions. Naidu must remember that farm loan waiver didn’t emerge as a fashion overnight.