The Economic Survey today warned against farm loan waivers saying if all states start offering them, the total burden could swell to Rs 2.7 lakh crore and cause deflationary shock to an economy yet to gain full momentum.
Farm loan waiver has been presumed to be inflationary.
But the short-term consequences are likely to be "quite deflationary", it said.
So far, Uttar Pradesh, Karnataka, Maharashtra, Punjab, and Tamil Nadu have announced farm loan waivers. But the Supreme Court has stayed the decision of the Madras High Court to provide loan waivers to all farmers instead of only to small and marginal ones.
"There is possibility of a contagious spread (of farm loan waiver) to other states," according to the mid-year 2016 -17 Economic Survey released for the first time.
If other states will follow the UP model, an upper bound of loan waivers at the all-India level would be between Rs 2.2 and Rs 2.7 lakh crore, it said, adding that demands for farm loan waivers have emerged at a time when state finances have been deteriorating.
Assuming that the Centre will not take responsibility for the waivers and if states finance on their own, then aggregate demand would be affected.
"Loan waivers could reduce aggregate demand by as much as 0.7 per cent of GDP, imparting a significant deflationary shock to an economy yet to gain full momentum," the Survey said.
The aggregate demand could be affected as a result of reduction in private consumption and higher borrowings by states, among others.
"However, the actual impact will depend on the number of states that actually decide to grant waivers, and how they distribute them over time," it added.
It is estimated that for states with fiscal space, loan waivers would add about Rs 6,350 crore to demand via the additional interest costs. For states without such space, waivers could reduce demand by about Rs 1.9 lakh crore.
Uttar Pradesh has announced waivers of up to Rs 1 lakh for all small and marginal farmers, while Punjab's limit is Rs 2 lakh for small farmers without defining who these are and Karnataka has limited the waiver amount to Rs 50,000. But Maharashtra s waiver terms are still unclear, the Survey said.
Pointing out that the waiver announced by these states do not make clear whether the amounts will apply to households or loans, the Survey said it is assumed that waivers will apply at the loan rather than household level, since it will be administratively difficult to aggregate loans across households.
According to the Survey, the sudden demand for loan waivers has emerged because of agrarian stress at a time of plenty.
"The distress could have been because received prices were lower than those last year, and mostly lower than MSP prices," it said.
Stating that agrarian stress is difficult to measure objectively, the Survey said the manifestation are easy to see demands for loan relief and restiveness in a number of states but it is difficult to disentangle their political and economic origins.
"Nevertheless, there seem to be proximate economic causes for stress, reflected in lower prices and lower farm revenues," it added.
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