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UP farm loan waiver: PM Modi has put Yogi Adityanath in a spot; there isn’t an easy escape

With Union Finance Minister Arun Jaitley asking the states to find own resources to carry out farm loan waivers, Yogi Adityanath is set to face his first big political test in his new avatar as Uttar Pradesh chief minister.

During the UP poll campaign, Prime Minister Narendra Modi had promised the farm loan waiver in the first cabinet meeting once his party takes over power in the state. Now, it is impossible for Yogi to outright disown a promise made by his top leader in the poll campaign and something that prominently figure in the party’s poll manifesto. Modi was the face of the BJP but Yogi is the one who will have to answer to the poor farmers of UP who would have voted to the party in the hope of getting their loans waived. Hence, the buck stops at Yogi not Modi.

 UP farm loan waiver: PM Modi has put Yogi Adityanath in a spot; there isn’t an easy escape

Prime Minister Narendra Modi and UP Chief Minister Yogi Adityanath. PTI

Yogi’s dilemma will be to find the resources to fulfill this promise given the state’s constrained balance sheet. There is absolutely no clarity on who will foot the bill. That leaves only two options for him -- either to simply pass the blame to the Centre or find some ways to raise the money. The latter looks difficult for UP at this stage.

What is the cost of the UP loan waiver? A recent SBI research report had warned about this problem. Going by this, the hit to the state would be approximately Rs 27,420 crore (total loans that will have to be waived off for the small and marginal farmers for all banks).

“UP Government’s total revenue for FY17 was Rs 3,40,255 crore according to revised estimates. Thus, the amount of Rs 27,420 crore to be waived off is approximately 8 percent of total revenue. This will definitely cause some amount of stress for the state’s fiscal arithmetic in the coming year. The incumbent Government in UP has to go beyond the traditional solutions and find innovative ways of adding to its revenues,” the report said. SBI analysts have arrived at this figure looking at the Socio-economic and Caste Census 2011, that said 40 percent of rural households of Uttar Pradesh are engaged in cultivation.

When it comes to landholdings, 92 percent are marginal and small landholdings in Uttar Pradesh according to 2010-11 Agriculture Census. Total outstanding credit, in 2016, for the agriculture sector is Rs 86,241 crore in Uttar Pradesh, with average ticket size of Rs 1.34 lakhs.

According to 2012 the RBI's data, 31 percent of the direct agriculture finance went to marginal and small farmers (landholdings up to 2.5 acres), the report said. “Taking this as a proxy for Uttar Pradesh as well, approximately Rs 27,420 crore will have to be waived off in case the loan waiver scheme is implemented for the small and marginal farmers for all banks,” the SBI report said. The demerits of loan waiver and how it irrevocably destroys the credit culture of an entire geography is discussed in an earlier column.

To begin with, making a loan waiver promise itself was a mistake by Modi on account of well- documented reasons. Such a measure instantly and irrevocably destroys the credit culture of the farmer in an entire geography and even lessens the chances of these farmers for securing future credit with ease. It has happened during the 2008 UPA farm loan waiver and elsewhere in the country. Also, never in the past state-run banks (which are the obvious targets to roll out populist policies) have been compensated on time for waiving loans. Hence, this puts a major burden on the banks’ balance sheets.

Not just Modi, even for the Congress party, loan waiver promise has been the biggest poll plank in the run up to the UP polls. Congress Vice President, Rahul Gandhi assured the farmer that the waiver will happen within 10 days of his party coming to power. For a seasoned politician, offering freebies has become the easiest way to woo the poor to win votes. But, rarely the politician thinks about the deep damage the announcement is likely to cause to the credit culture and state finances. This is the reason why the Reserve Bank of India has repeatedly cautioned against such an exercise.

If one looks at the RBI's credit growth figures, funding shortage has never been an issue for farmers. Every year, under the target set by Union Budget and also to comply with priority sector lending rules, banks lend heavily to the sector. But, despite this, the sector continues to be economically stressed. That gives us the sense that it is not money or freebies that the farmer need and problem lies somewhere else. May be the solution lies in offering better farm technology, assistance to procure and store farm products and get good value for the farmer for the produce.

In the context of Uttar Pardesh, Yogi has a tougher economic environment now. The ongoing slaughter ban might help the party strengthen its core Hindutva agenda and consolidate its voter base but, it will give a jolt to the state exchequer.

According to an Icra report, UP accounts for the highest share of buffalo population at 28 percent and houses 60 percent of slaughter houses and meat processing units in the entire country. “In 2015-16, Uttar Pradesh exported 5,65,958 metric tonnes of buffalo meat. There is no other state in the country with the resources or the bovine numbers that could even come close to filling this huge hole,” the report said. This means, Yogi can right away forget about unnecessary populist expenditures such as loan waivers and work on getting the state finance in order by focusing on the fundamentals.

For now, failing to fulfill Modi’s election promise on loan waiver will be an image-spoiler for Yogi, who will have to face the wrath of poor farmers. How will the Gorakhnath temple priest deal with the situation is something one needs to wait and watch.

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Updated Date: Mar 24, 2017 13:41:16 IST