Farm loan waivers could be detrimental to the economy as they could reduce aggregate demand by 0.7 per cent of GDP, imparting a significant deflationary shock to the economy, the Survey said.

There is visible farm stress, even though it is not as widespread as it is made out to be, the Survey said, adding that the drastic decline in farm revenues was nothing short of mystery.

If all State Governments resort to farm loan waivers, like the five States that had announced them, the aggregate demand would come down by ₹1.1 lakh crore.

So far, only Karnataka, Maharashtra, Punjab, Tamil Nadu and Uttar Pradesh have announced crop loan waivers for the farmers. If other States were to follow suit, the total loan waivers could top ₹2.7 lakh crore, the Survey said.

With the Centre categorically stating that it would not assume any responsibility for loan waivers, the States might have to finance the waivers on their own. But, most States are not in a position to absorb the additional burden arising out of the waivers because of their already squeezed fiscal space, it said.

This is because their spending is influenced by their need to respect the Fiscal Responsibility Legislation targets. “If they assume higher debt, they will in many cases need to cut other spending (or increase taxes). Once these spending changes take place, there will be second-round effects,” the Survey said.

One of them would be the subdued aggregate demand. The survey estimated that the cumulative reduction in aggregate demand would be ₹9 lakh crore.

A portion of this would be offset by public sector banks as they would be able to take non-performing farm loans off their balance books. This would help them to provide additional financial resources to the private sector, leading to greater spending, according to the Survey.

It argued against farm loan waivers saying it would only transfer liabilities from private sector to public sector balance sheets. Loan waivers, it said, will increase the net wealth of farm households as farmers’ aggregate income will increase 28 per cent.

The official document, on the other hand, admitted that there is farm stress in the country.

The economic distress, however, was not a generalised phenomenon, it said citing the example of wheat and Bengal gram whose market volume and prices picked up during the year. A decline in real farm revenue, however, was witnessed in pulses and vegetables like potato. The fall in revenue was maximum in the case of moong which dropped 30 per cent, followed by arhar (10 per cent).

The Survey said normally, increased supply leads to large declines in prices. “The puzzle is why it reduced prices so much that it depressed farm revenues. After all, in 2014 output surged in a number of crops including arhar, potatoes and onions without yielding revenue declines,” it said.

“This year appears to have been atypical in the magnitude of price decline,” it said.

Published on August 12, 2017