Farm loan wavers can impact India’s financial profile – Fitch

Ratings agency Fitch said the string of farm loan waivers announced by various Indian states could impact the financial profile of the country as a whole.

The agency, however, did not directly say that the moves could lead to a downgrade in India’s credit rating, which would increase the cost of borrowing for both government and private sector enterprises in the country.

“When India’s rating was affirmed at ‘BBB-‘/Stable in May, Fitch forecast general government debt to fall to 64.9% of GDP by FY21, from 67.9% in FY17, and we highlighted that potential changes to India’s fiscal position are a rating sensitivity,” it said.

However, while the center has indeed shown progress towards achieving the prediction, “the combined finances of the states – which are included in general government debt and deficits – have been under pressure,” it said.

“The impact on India’s 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,” it added.

“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, and with the 2019 Lok Sabha election drawing nearer.”

The last widespread farm loan-waiver scheme was rolled out in 2008 by the central government, and covered 43 million farmers.

It cost an estimated 1.3% of GDP.

This time, schemes have been announced in Uttar Pradesh, Maharashtra, Punjab and Karnataka, which account for around one-third of India’s population.

“Other governments are likely to feel pressure to implement similar policies, particularly in states with upcoming elections. A roll-out across much of India is not unthinkable,” Fitch said.

While the schemes will benefit banks, which could offload farm loans with weak repayment prospects to state governments, it could also affect repayment of future loans.

“Uniform farm loan waivers could lead to moral hazard and weaken the general repayment culture among financially healthy farmers, but they will still have an incentive to repay loans in order to retain access to future funding,” it said.

Agricultural loans account for 14% of total bank lending, according to the Reserve Bank of India, and are equivalent to around 6.5% of GDP.