Professional Documents
Culture Documents
Consequences:-
Pros
• India, which had surplus food stocks for many years, has been
importing food grains in the recent past. If the trend
continues, it was feared hat the country would have to import
more food grains subject to the world prices. A populous
country like India cannot afford to be dependent on imports
for food grains. The loan waiver is one of the steps to improve
food production.
It would not only relieve the farmers from debt, but will also
boost our agriculture sector and self-sufficiency in food
grain production
Cons:
On the flip side this scheme is seen as rewarding wilful default and
distorting the credit and enterprise climate.
The Centre could be able to reimburse the money due for banks for
the waiver only by printing additional currency, which would lead to
heavy inflation. It remains as yet unclear as to how exactly the
government intends to fund the scheme for there is no provision in
the budget, nor is there any indication as to what it would do to the
fiscal deficit.
There are apprehensions over the farm credit waiver as the sources
of funding remain unclear as also the overall package for the
agricultural sector. There will be a huge liquidity gap created
because of the farm credit waiver which needs to be met with some
extra provisions.
He asked how the government would provide funds for the waiver of
farm loans from tax receipts, when the total tax receipt was only Rs
one lakh crore. Even If the government would waive farm loans in
instalments, it would not be possible to provide huge funds.
(There is a more material question of banks facing an increase in their NPAs (non-
performing assets) as a result of the “directed” write-off unless they are already
provided for or there is a special dispensation that such loans covered under the
mandated “write-off” be not included under NPAs. Such a dispensation by the RBI
would be contrary to all financial prudence. When the loans are written off, there has
to be a supply of resources from the Government either by way of a grant or loan. A
loan would mean an increase in liability, which would lead to the banks being equally
worse off. Reputed chartered accountants and lawyers have pointed out that it is not a
question of liquidity only but also of banks being solvent. To the extent to which the
Government asks banks to write off the loans, there will definitely be a write down in
the profitability of the banks. The Rs 60,000 crore may look small compared to the
Government’s Budget. But when it comes to individual banks, the implications may
be quite different. The government's reported move may also defy macro-level fiscal
prudence. Considering the huge volume of total non-performing assets related to
agriculture, the funds needed for such a measure would be in excess of Rs 32,000
crore (Rs 320 billion).If the rescheduled farm loans are also taken into the reckoning,
this figure might touch a mind-boggling Rs 90,000 crore (Rs 900 billion). Doling out
such mammoth sums would, obviously, adversely affect the availability of funds for
other pressing developmental needs. As it is, the government is subventing 2 per cent
of interest on crop loans of up to Rs 2 lakh (Rs 200,000) disbursed by the banks at 7
per cent interest, instead of the usual 9 per cent.)