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Negatives of Farm Loan Waiver

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April 13, 2017

Why in news?

  • Madras High Court has directed the government recently to extend the farm loan waiver to all the farmers irrespective of their extent of landholding.
  • The UP government also recently announced farm-loan waiver.

What are the negatives of waiver?

  • It undermines an honest credit culture.
  • Loan waivers will affect state government finances by increasing the deficit and worsening the quality of expenditure. Overall government borrowing goes up.
  • Factors include rise in wage bill and under-provisioning of interest payment for Ujwal DISCOM Assurance Yojana (UDAY) bonds etc. Farm-loan waivers will further increase the risk of slippage.
  • The possibility of implementation of loan waivers in other states will have a bearing on the national balance sheet.
  • State governments at the aggregate level account for about 60% of total government expenditure.
  • So maintaining fiscal discipline and quality of spending at the state level is becoming increasingly important.
  • Even though the fiscal onus of loan waivers will be on states, it affects the Central government as the chances of a credit-rating upgrade will diminish.
  • Yields on government bonds also are impacted.
  • It it can also lead to the crowding out of private borrowers as higher government borrowing can lead to an increase in cost of borrowing for others.
  • A consensus should be created so that loan-waiver promises are avoided, as sub-sovereign fiscal challenges can affect the national balance sheet.

 

Source: Livemint

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