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Business
13 Jun 2017

Loan waivers: state's solution would become an entire nation's problem

Loan waivers will do more damage than good

Every state should come to the aid of its farmers; after all, they are the backbone of our economy.

However, before coming to someone's aid, one should seriously consider whether the aid, in this case loan waivers, is something that they can afford to provide without digging a hole that they themselves can't come out of.

Here's all that you need to know.

In context

Loan waivers will do more damage than good
The states are on their own on this one

FinMin

The states are on their own on this one

FinMin Arun Jaitley has made it quite clear that that the NDA government will not spend a single dime from its coffers to help the states in their attempts to waive off farmers' loans.

However, states, on their own, simply don't have the power to cough up the gargantuan amount of money that's needed to write off the loans; unless they cut some corners.

State

Where will they get the money?

Now, if states like Maharashtra, Madhya Pradesh, and others actually go through with their promises of writing off loans; they will have to direct the money, which has been allocated for other projects, to attain this goal.

The state governments will, therefore, have to put the progress of their regions to a standstill for an extended period of time, leading to a potential disaster.

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There will still be a sizable debt

Debt

There will still be a sizable debt

Let's say that the governments actually manage to do so, but it should be pointed out that the state governments will only waive off crop loans. So the farmers will still have to pay the loans that they've incurred to buy equipments etc.

The debt burden can be decreased, no doubt, but it cannot be eliminated, therefore, there will be no immediate benefits.

Hole

Recovering from it will be tough

After loan waivers are completed, according to Bank of America Merrill Lynch report, the Indian economy as a whole will be left bereft of $40 billion, or 2% of national GDP.

This move comes at a time when states have pushed their combined deficit to a 13-year-high with their unbridled spending without devising any new significant revenue channels that could cushion the fall.

One more blow to the banking sector

Due

One more blow to the banking sector

Banks are already balking under NPAs, now with the hope of loan waivers in the wind, several farmers have stopped making loan payments altogether and the rate of default has escalated to almost 50% in some states.

Farmers are also emptying their accounts so the banks can't deduct their dues. If farmers of all states continue this, the banking sector will collapse.

Finance

Don't pull the trigger

Maybe it's a purely philanthropic attempt, maybe it's a way to woo the voters before the elections come knocking at the door; whatever the intentions are, it's also a financial suicide note.

India's debt-to-GDP ratio currently stands at 68%, which is the highest among emerging economies and it'll only get higher if loan waiver schemes are executed; pulling back the growth of the country.

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