The farm loan waiver has come as a bolt from the blue for states and for their fiscal viability. While Uttar Pradesh and Maharashtra have committed to waive loans of farmers, governments in Andhra Pradesh and Telengana seem to be going down the same route. Pressure is also building upon Madhya Pradesh, Odisha, Tamil Nadu and Karnataka to declare loan amnesty.

The waiver bill for these states will be 1 per cent of the GDP, which is projected to be ₹168,47,455 crore this year. Already, the overall fiscal deficit of states is 3.4 per cent of last year’s GDP. This is higher than the 3 per cent target set under the Fiscal Responsibility and Budget Management (FRBM) law. With the Centre ruling out any support, the states have very little option but to go in for market borrowings.

Taken together with the fiscal pressure unleashed by Uday Bonds, the aggregate fiscal deficit (as a percentage of GDP) for the States this year could be 4 per cent , said DK Srivastava, Chief Policy Advisor, EY India, a professional services firm.

Under the Ujwal Discom Assurance Yojna (Uday), states take over three-fourths of the debt of their respective discoms, and then issue ‘UDAY bonds’ to raise money to pay off the banks.

Maharashtra is staring at a farm loan waiver bill of at least ₹35,000 crore, and is widely expected to tap the market for additional borrowing. Although the State was in a better financial condition till a few years ago, it has been weakened by the Uday Bonds.

"The deficit could remain at 4 per cent level in 2018-19 also. As we move into general elections in 2019, the pressure for farm loan waiver is expected to continue and the aggregate spend on this count could be 1-1.5 per cent of GDP in 2018-19", Srivastava said.

There is a fear that states might have to lower their social spends to spare money for the waiver. “We need to watch the fiscal situation, and ensure that our commitments to education and health sectors are not diluted,” said Arvind Panagariya, Vice-Chairman, NITI Aayog.

Blessing in disguise Fortunately, raising money from the market may not be that difficult for the states, given the high proportion — 7 per cent of GDP — of savings in the economy. And there is a blessing in disguise in the form of a weak private investment demand, which takes off the pressure on the savings.

At the same time, states will have little room to levy additional indirect taxes to fund their needs. With the GST regime from July 1, states cannot levy additional taxes beyond what has been agreed to under the framework approved by the GST council.

The Reserve Bank of India (RBI) has been discouraging states from taking the step. "The RBI stand on farm loan waiver by any State has been articulated several times including the last monetary policy statement by the RBI Governor. As for implementation, I don't think we need to work as nodal agency for its implementation", said SS Mundra, RBI Deputy Governor.

Experts say there are two options for the states who go for loan waivers – either they abide by the FRBM and cut expenditure somewhere else, or else the Centre lets them (States) go off their FRBM limit. But there is a risk that in order to cut expenditure, states might lower their spends in critical areas like health and education. In 2016-17, even without the pressure of a loan waiver, many states have gone beyond their FRBM limit, said an economist who didn’t want to be named.

With inputs from Richa Mishra

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