Farm loan waiver may dent state finances, risk slippage: Fitch

29 Jun 2017

Loan waiver schemes being doled out to farmers could have a significant impact on state government finances and pose risk of further fiscal slippages, Fitch Ratings said.
Four states-- Uttar Pradesh, Maharashtra, Punjab and Karnataka, which account for around one-third of Indias population-- have announced farm loan waivers and other state governments are likely to feel pressure to implement similar policies, particularly in states with upcoming elections, it said.
"The farm loan-waiver schemes being discussed and rolled out across an increasing number of Indian states could have a significant impact on state government finances, and might undermine efforts to bring down general government debt," Fitch said in a statement.
Larger state deficits would delay an expected gradual reduction in general government debt, which includes central and state government debt.
"There is a risk that farm loan waivers - which we have not previously factored into our assumptions - will lead to further fiscal slippage at the state level or will reduce the funds available for public investment.
The central government has the authority to block states from borrowing to finance persistently large deficits, but it could be reluctant ahead of approaching elections in some states, with the 2019 Lok Sabha election drawing nearer," Fitch said.
The Centre has gradually consolidated its fiscal position in recent years, and has indicated that loan waivers will have to be funded from state coffers.
"However, the combined finances of the states - which are included in general government debt and deficits - have been under pressure.
Public pay hikes, election spending and higher interest costs stemming from the UDAY scheme - under which state governments have taken on debt from power distribution companies - are all likely to add to expenditure," Fitch said.
However, the impact on Indias debt dynamics and capital spending will depend on the total size of loans waived, how the scheme is financed, and whether there are possible offsets from cuts to other forms of spending, including capital projects.
While affirming Indias rating at BBB- with stable outlook in May, Fitch forecast general government debt to fall to 64.9 per cent of GDP by fiscal 2020-21, from 67.9 per cent in fiscal 2016-17, and highlighted that potential changes to Indias fiscal position are a rating sensitivity.
Public finances are a key weakness in Indias sovereign credit profile, with general government debt well above the BBB median of 40.9 per cent and the fiscal deficit of 6.6 per cent of GDP in 2016-17 much higher than the BBB median of 2.7 per cent.
Fitch said banks could also be affected by the waiver schemes.
It will only benefit banks to the extent that they offload farm loans with weak repayment prospects to state governments. (PTI)