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Farm loan waiver worth Rs 80,000 cr likely to push inflation up 0.2% permanently, says RB

Farm loan waiver amounting to Rs 88,000 crore likely to be released in 2017-18 by seven states, including Uttar Pradesh and Maharashtra, may push inflation on permanent basis by 0.2 per cent, says a RBI paper.

In India, farm loan waivers have been announced intermittently by both the central and state governments to provide relief to farmers facing distress due to natural calamities/crop failure.

Loan waivers could add to the fiscal burden over the medium term as they are essentially a transfer from taxpayers to borrowers, said Mint Street Memo released by the RBI.

“Based on stylized assumptions, the total loan waiver amount that is likely to be released in 2017-18 by seven states is around Rs 881 billion (0.5 per cent of Gross Domestic Product, GDP),” it said.

Mint Street Memos (MSM) are in the form of brief reports and analysis on contemporary topics, prepared by the staff of RBI and Centre for Advanced Financial Research and Learning (CAFRAL), or drawn from one of the recent publications of the Bank.

The RBI said the views and opinions expressed in Mint Street Memos (MSM) are those of the authors and do not necessarily represent the views of the central bank.

“It is also pertinent to note that random fiscal policy shocks, such as loan waivers, have an enduring impact on market borrowings, as evident from past episodes of such waivers,” the document said.

Andhra Pradesh and Telangana had announced farm loan waiver in 2014; Tamil Nadu in 2016; and Uttar Pradesh, Maharashtra, Punjab and Karnataka in 2017.

To summarise, the paper said “if the combined fiscal deficit for 2017-18 goes up by 40 bps on account of farm loan waivers, with the budgeted combined fiscal deficit at 5.9 percent for 2017-18 and inflationary momentum remaining benign, ceteris paribus, this may lead to around 20 bps permanent increase in inflation, starting 2017-18”.

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