Given the state’s debt of Rs 2,45,000 crore and its fiscal deficit of 3.8% of GDP in FY12, and the fact that it continues to look for a Rs 90,000 crore financial package from the Centre in return for the Samajwadi Party’s loyal ally status, Uttar Pradesh’s R1,650 crore loan waiver for 7.2 lakh farmers on Mulayam Singh Yadav’s 74th birthday is amazing profligacy. But, at one level, it can be ignored since, if the Centre doesn’t end up giving the state extra sops (though ruling that out is quite naďve), the state will have to make other cuts in expenditure somewhere else. The problem, however, is that the loans being waived are from the Uttar Pradesh Cooperative Rural Development Bank which has depositors’ funds, so at some point you may find the central government stepping in to ensure innocent depositors are not affected.
More worrying is that, with elections looming, others including the central government may also follow suit. Punjab has commissioned a study by three leading universities on farmer suicides and may well come to the conclusion, like Uttar Pradesh has, that loans are one big source of farm stress. Chandrababu Naidu has promised to do much the same in Andhra Pradesh if he comes to power—while investing more in farm infrastructure or freeing farmers from the clutches of mafias in mandis and the high taxes the states themselves impose will take time, waiving loans is a quicker fix and certainly easier to market as proof of a pro-farmer government.
Since a large part of the loans being waived in future are likely to be from PSU banks in case the Centre decides to go in for a waiver of the sort it did in 2008 when R70,000 crore were waived off, this could spell big trouble for the banks. NPAs along with restructured assets are around a tenth of all loans by the banking sector already and while it is true that restructured assets are the lowest in agriculture (1.45% of advances as compared to 8.24% in the case of industry, and 9.34% in the case of larger industrial units), this would change immediately. In any case, in two of the last three years, advances to the agriculture sector have been outstripped by the growth in restructuring of these loans—between 2009-10 and 2011-12, according to data provided by RBI deputy governor KC Chakrabarty, restructured farm loans outstripped gross farm