Farm Loan Waivers could Hit States’ Capex says India Ratings

According to India Ratings, farm loan waivers announced by several states can adversely impact the combined state government expenses on capital assets. The Rating agency said this in a study after agricultural anguish appeared to have emerged as an important election issue in the recent round of voting.

It said, in contrast to popular perception, the state government expenditure on capacity expansion is a key driver of investment growth in the economy and has been higher than the capacity expansion undertaken by the Central government.

During fiscal adjustment periods, the capex becomes the soft target for shortfall control. And this has been observed in Rajasthan, Maharashtra and Karnataka, when these states announced farm debt waiver outside the budget in financial year 2018.

In spite of mobilising higher income than budgeted, these states were not able to maintain the revenue deficit at budgeted level because of increased revenue expenses caused by the farm-loan waivers, said the rating agency.

Rajasthan and Karnataka had cut their spending on capacity expansion by 12.0 and 2.5 percent, respectively, to counterbalance the increased revenue expenses but they still failed to maintain fiscal deficit at the budgeted level. While fiscal deficit or GSDP of Maharashtra was lesser than budgeted, then capex witnessed reduction, it noted.

State government’s role is more vital than generally perceived by both capex and endowment of human resources that are essential for achieving sustainable growth. Hence, the agency believes that the policy makers as well as companies must focus more on state government budgets.

The capital expenditure spend in the budget is generally divided between developmental & non-developmental items.