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Only Maharashtra has fiscal capacity to pay for farm loan waiver: CARE

LiveMint logoLiveMint 15-06-2017 A staff writer

Mumbai: Maharashtra is the only state with the fiscal capacity to pay for a farm waiver from its own resources without breaching its fiscal responsibility commitments, according to a study by CARE Ltd.

The ratings agency has reached the conclusion from an analysis of the state budgets for the current financial year, taking into account the fiscal deficit target equivalent to 3% of gross state domestic product set by the 14th Finance Commission.

Earlier this week, the Maharashtra government announced a sweeping farm loan waiver for marginal farmers which is expected to cost the state government Rs30,000 crore. This follows a similar announcement by the Uttar Pradesh government in April; Uttar Pradesh’s waiver is worth Rs35,000 crore.

Farmers in states from Punjab to Tamil Nadu, reeling from factors ranging from drought and higher input prices, are staging protests demanding similar waivers.

Not only have experts warned about the moral hazard posed by loan waivers, they are also pointing to the danger of state finances being upset by such largesse, given that the central government has ruled out bearing a share of the burden.

The CARE analysis shows that among the states it analysed, Maharashtra has the highest fiscal headroom of Rs38,789 crore that it can sustain over its current fiscal deficit in order to remain on the fiscal consolidation path.

This fiscal leeway has been calculated on the basis of the current financial year’s fiscal deficit projection and the additional headroom available as per the 14th finance commission’s recommendations.

While asking states to stick to a fiscal deficit of 3% of gross state domestic product (GSDP), the panel had provided additional headroom of 50 basis points provided a state meets certain conditions such as a running a revenue surplus and a debt to gross state domestic product ratio of less than 25% the previous year. One basis point is one-hundredth of a percentage point.

Consequently, states such as Bihar, Karnataka and Telengana can run a maximum fiscal deficit of 3.5% of GSDP, and still not stray from the fiscal consolidation path.

However, their current fiscal deficits are close to the maximum permissible limit, leaving them with little leeway to meet farm loan waivers (if any are given) from their own resources. Maharashtra, has the lowest fiscal deficit ratio in CARE’s sample (barring Goa) at 1.5% which gives it the maximum headroom.

In this analysis, the key assumption of CARE is that states will stick to these revenue and expenditure targets set in their budgets and will not have to compromise on any of these headings.

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