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State finances and the bogie of loan waivers and liquor bans

Aditya Laxman Jakki/New Delhi 21 Apr 17 | 07:04 PM

A liquor shop being shifted following the directive of the Supreme Court to shut vends located within 500 metres of national and state highways in Gurugram on Sunday. Photo: PTI

If asked what the most popular subjects under discussion are, of late, in the politico-economic world, many would point to farm loan waivers and liquor ban. Consecutive announcement of farm loan waivers and liquor bans in various states in the recent past looms the risk of missing fiscal targets for the financial year (FY) 2017-18.

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Discussions about these two developments gained ground more after the recently concluded assembly elections in five states, in which the winning parties in Punjab and Uttar Pradesh promised to waive loans of millions of farmers.

As promised, the Uttar Pradesh government cleared a loan waiver of Rs 36,359 crore for marginal and small farmers in the state in its very first cabinet meeting. The waiver, which is capped at Rs one lakh per loan, cost the state exchequer Rs 30,729 crore, benefitting over 21 million farmers.

There are almost 700,000 farmers whose loans have turned bad. The state government has decided to write off even these loans, amounting to Rs 5,630 crore.

Another state, Punjab, is yet to announce the waiver, but Chief Minister Amarinder Singh has repeatedly assured he would fulfil the election promise.

Citing Punjab Agriculture University's survey, Business Standard reported that the total farm indebtedness in Punjab was around Rs 69,355 crore (Click here to read the story).

Now, pressure is mounting on the Bharatiya Janata Party (BJP) government in Maharashtra, as ally Shiv Sena is demanding that the party implement a waiver along the lines of the one its own government did in UP.

However, the Maharashtra government refuses to budge, saying it would cost the exchequer Rs 30,000 crore.

Earlier, the Tamil Nadu government had also waived loans amounting to Rs 5,780 crore, for about 1.69 million farmers, as the state faces one of the worse droughts in decades. Making matters grimmer for an already high revenue deficit state, the Madras High Court has directed the state to extend the waiver to more people without any categorisation. The court's order would benefit over 300,000 people, at a cost of an additional Rs 1,980 crore to the state.

However, the drought was merely coincidental, as the ruling party AIADMK has announced the waiver during 2016 assembly elections.

The Karnataka government too has urged the Centre to announce a loan waiver for farmers, as the state is facing drought. However, the Centre has rejected the demand.

And neighbouring Kerala is facing its worst drought in 115 years.

While some states face grim financial situations due to loan waivers, others states face similar stress due to liquor bans.

Bihar had announced an outright liquor ban in late FY16. The state's revenue surplus rose from Rs 4,820 crore in 2011-12 to Rs 12,507 crore in 2015-16. In 2016-17, after the liquor ban was implemented. the state's revenue surplus stoid at Rs 8,244 crore against the budgeted Rs 14,649 crore, indicating a trend reversal. The impact of liquor ban is clearly visible.

As a consequence, Bihar's fiscal deficit touched 4.2 per cent in FY17 against a target of 2.87 per cent in FY17 and 2.48 per cent in FY16. The borrowings of the state increased in order to meet expenditure targets. Therefore, its outstanding liabilities rose from 18.2 per cent in FY16 to 19.6per cent in FY17.

However, Bihar Chief Minister Nitish Kumar has been campaigning all over the country promoting the liquor ban as done by his government.

Joining him, Gandhian activists like Medha Patkar are building up pressure in various states, especially those ruled by the BJP. As a fallout of this, Madhya Pradesh and Chattisgarh announced phased liquor bans just last week (click here to read the story). Details of these bans are yet to be known.

The Supreme Court added fuel to the fire by ordering the shutting down or relocation of all the liquor shops within the 500 metres of state and national highways. The order is likely to affect nearly a third of the more than 65,000 licensed branded liquor outlets in the country.

"There could be an immediate impact on revenue growth, both from prohibition and from the nationwide curbs on the sale of liquor near the highways. Nevertheless, the money that used to be spent on liquor will probably be spent on some other items of consumption, earning revenues for the government. However, other consumption is unlikely to be taxed at rates as high as alcohol," says Aditi Nayar, Principal Economist, Icra Ltd.

According to an industry body estimate, the collective revenue loss from the ban could be around Rs 50,000 crore. States that lean heavily on tourism are likely to be the worst hit. These include Goa, Rajasthan, and the union territories of Daman and Diu.

Maharashtra’s Excise Minister Chandrashekhar Bawankule said the state government will lose Rs 7,000 crore as a result of the ban on liquor sale along the highways. The state already has a very high revenue deficit.

ALSO READ: How SC's highway liquor ban is hurting states

Nayar further says, "Every state will have to balance fiscal targets and constraints with social goals. If a shortfall in revenues threatens to make fiscal targets go awry, states will have to come up with other resource mobilisation measures or draw up expenditure control plans."

The numbers mentioned above aren't small by any stretch of imagination. States already have to deal with lot of issues regarding their finances, and the waivers and bans are only going to increase their woes.

"The extent of fiscal burden on each state government would be a function of the structure and size of the loan waiver it announces, and the extent to which any additional resource mobilisation or expenditure control measures are planned to absorb a portion of the costs," says Jayanta Roy, Group Head-Corporate Sector Rating, Icra Ltd.

While the Yogi Adityanath-led BJP government has assured it will raise funds for the waiver through a 'Kisan Relief Bond' and also promised to cut down waste expenditures, the Amarinder Singh-led Congress government in Punjab has formed a committee for finding ways to raise funds.

Danger of missing fiscal targets

During the Budget presentation in February 2008, the UPA government at the Centre announced an agricultural debt waiver amounting to Rs 60,000 crore, which eventually swelled to around Rs 72,000 crore in FY09. This has impacted the fiscal situation both at the Central and the state level in the following years.

In FY09, the Centre and states' cumulative fiscal deficit ballooned to 8.3 per cent of gross domestic product (GDP). This was a departure from the path the country had followed from FY02 to FY08. In FY02, the cumulative fiscal deficit was at 9.6 per cent and it came down to four per cent in FY08. The debt waiver changed all that, and fiscal deficit rose to 9.4 per cent in FY10. Things improved later and cumulative fiscal deficit began declining steadily from 2012 onwards. However, the past two financial years have seen another downturn, with both, the Centre and the states missing their deficit targets.

In Union Budget 2017, the Centre delayed the fiscal deficit target of three per cent to the next financial year and set the target of 3.2 per cent for the current year.

HSBC's report, "A study of India’s state finances - Balloons and rockets" says, the states' fiscal deficit in FY17 is at 2.8 per cent against a target of 2.6 per cent. The numbers could be further revised, as Bihar has missed its target of 2.87 per cent by a huge margin, and stands at 4.2 per cent.

There is no reason to believe that states would meet the 2.6 per cent target this year as many are mulling a rise in borrowings.

"In our view, debt waivers would engender an additional burden on the respective states’ fiscal balances, necessitating further debt raising beyond our initial forecast of Rs 4.5 trillion (Rs 4,50,000 crore) of gross state development loans for FY18," say Roy and Nayar of Icra.

"Uttar Pradesh is going to breach its borrowing limits. The UP government cannot pay for this loan waiver unless its borrowing limit is extended. It cannot do it suo motto. It can only be done by specific approval from the Centre. Now the question is, will the Centre allow it in the absence of drought conditions," says economist and former Chief Statistician of India, Pronab Sen, adding that waivers are only justified under severe drought conditions.

But the Centre has unequivocally made clear that it will no more entertain such waivers by any state, irrespective of the party in power.

Even Reserve Bank of India (RBI) Governor Urjit Patel has said such waivers would hurt the honest credit culture.

The states missed fiscal deficit target despite a 0.4 per cent increase in the transfer of funds, at 6.5 per cent against the budgeted 6.1 per cent. This fiscal year, however, the transfer of funds is pegged at 6.4 per cent, which is lower than the revised numbers of FY17.

"The Centre has seriously cut back on number of centrally sponsored schemes. And, the states have to adjust as they are bound by borrowing limits," says Pronab Sen.

"We would assess the extent of deterioration in the state governments’ fiscal metrics, such as the fiscal deficit-to-GDP ratio and various indicators of leverage levels," add Roy and Nayar of Icra.

Telangana, Andhra Pradesh show the way

During the 2014 assembly elections, soon after the bifurcation, Telugu Desam Party (TDP) in Andhra Pradesh and Telangana Rashtra Samiti (TRS) made similar promises.

The Telangana government had implemented a loan waiver amounting to Rs 17,000 crore benefitting 3.6 million farmers. The amount was deposited into the beneficiaries' bank accounts in phases starting 2014. The government had put a Rs one lakh cap per family.

The Andhra Pradesh government had made over 4.5 million farmers eligible under the waiver, with a ceiling of up to Rs 1.5 lakh per family. The government had stated that around Rs 22,000 crore would be required to meet the demand.

The AP government tried to mobilise funds through various means, including issuance of bonds but the plan did not go as planned. Telangana faced similar problems.

The Centre and the RBI intervened as the joint state was just bifurcated and both states got permission to settle the dues in five years.

As of today, Andhra Pradesh has paid Rs 11,000 crore towards loan waivers and has a couple of more years to complete the process.

Meanwhile, Telangana, which had decided to pay Rs 17,000 crore in four tranches directly from the state exchequer, issued orders for the release of the final Rs 4,000 crore to banks last week.

"The state government can limit the size of the loan waiver, by restricting the debt being waived. It could, for instance, apply the waiver to loans raised during a particular period, or to short-term loans only, or to loans availed from cooperative banks. Moreover, the state could also take a call on whether to complete the waiver in the ongoing fiscal, or over a period of time. This would influence the extent of additional fiscal pressure in a given year," explain Roy and Nayar.

Devendra Pant, chief economist at India Ratings, says everything depends on the duration or instalments of repayment to banks. He feels the pressure on states would be less if they don't pay loans at one go.

Asserting that the situation differs from state to state, he believes a revenue surplus state like UP can find it less stressful to fund such waivers than as state like Tamil Nadu, which is facing serious revenue deficit. "In Uttar Pradesh's case, there would be more clarity after the presentation of the budget," he says.

Nonetheless, he adds, the financial conditions of all these states will deteriorate further.

Waivers no solution to farmers woes

In the first cabinet meeting, along with loan waiver, the Yogi government announced a plan to procure eight million tonnes of wheat by opening 5,000 purchase centres and offering Rs 10 per quintal towards carrying and stocking charges over the Rs 1,625 minimum support price (MSP).

This move did not attract much attention from the media, which was more focused on the loan waiver announcement.

"The very fact that the government has asked 5,000 procurement centres to procure eight million tonnes of wheat is commendable. It is a huge step. This will ensure that farmers in Uttar Pradesh get the MSP. In the agricultural landscape, Madhya Pradesh registered a growth rate of 9 per cent per annum in farm GDP over the past 10 years. And one of the big factors behind this achievement was the state's ability to implement a proper procurement system," says Agricultural Economist, Ashok Gulati, adding that markets must be allowed to function with minimal government controls.

Gulati believes waivers are no substitute for proper agricultural policy. He says the UPA loan waiver bore no fruit in the long run, and that most states are back to square one, as far as the plight of farmers is concerned.

However, highlighting the difficulties faced by potato farmers' in UP, Bihar and Assam following the price crash brought about by over production and demonetisation, he calls for setting up a bad bank or loan restructuring framework to bail out farmers.

Will GST come to the aid?

The country is going to shift to the goods and services tax (GST) regime on July 1. Various estimates put the additional GDP growth at 1-2 per cent, with inflationary pressures. However, there is a consensus among analysts that this would improve the revenue situation of many states.

However, if things don't turn out as expected and states face revenue losses, there are products like petroleum and alcohol under the states' ambit that could be taxed. This, along with compensation from the Centre, could act as a shield. However, those states where liquor is or will be banned, will have fewer options to escape financial difficulties. And, starting  May 1, eight states — the most vibrant parts of the country — are going to see shutting down of petrol pumps on Sundays, further affecting fuel consumption.

Explaining further, Roy and Nayar of Icra say, "Given the impending transition to GST, state governments may have the leeway to raise additional resources from a limited set of revenue streams. Moreover, committed expenditures, such as salaries, pension and interest payments, as well as subsidies and social welfare schemes, tend to be difficult to curtail. There is a significant risk that productive capital spending may end up being reduced to fund a portion of the loan waivers. "

(with inputs from B Dasarath Reddy)

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