According to the paper, total loan waiver amount by seven states is likely to be around 881 bln rupees in 2017-18. This can push retail inflation by 20 basis points or 0.2 per cent.
Mumbai : State governments’ farm loan waivers may raise India’s headline retail inflation permanently by around 20 basis points by way of a higher fiscal deficit, according to a paper by staff of the Reserve Bank of India. “Loan wai-vers could add to the fiscal burden over the medium term as they are essentially a transfer from tax payers to borrowers,” the paper released on Monday, said. “Based on stylised assumptions, the total loan waiver amount that is likely to be released in 2017-18 by seven states is around 881 bln rupees. Depending on possible sources of financing, the additional burden… may result in an increase in the consolidated Gross Fiscal Deficit-Gross Domestic Product ratio of the states by about 20-40 bps,” it added.
The paper, authored by members of RBI’s Monetary Policy Department and Department of Economic and Policy Research, said data suggested the relationship between fiscal deficit and inflation in India was such that at higher levels of fiscal deficit, the impact on inflation is greater.
For 2017-18 (Apr-Mar) alone, if the combined fiscal deficit rises by 40 basis points (bps) due to farm loan waivers, inflation could rise permanently by around 20 bps. While the paper does not reflect the views of the RBI, the central bank has made its opposition to farm loan waivers clear on several occasions.
In its August resolution, the Monetary Policy Committee had said the implementation of the farm loan waivers may result in fiscal slippages and “undermine the quality of public spending, entailing inflationary spillovers”.
