UP Budget: Loan waiver unlikely to support rural spending

Whether farm loan waivers would boost rural spending critically depends on how these waivers are funded. In Uttar Pradesh (UP- which recently presented its Budget), while the waiver is being routed through fiscal balance, it has not resulted in expansion in fiscal deficit/debt. Rather, the waiver is accommodated by highly optimistic revenue projections – the state’s own tax collections are projected to grow at 30% YoY in FY18 vs 10% average in past 5 years. Even factoring in GST-led tax buoyancy, we think even 18-20% growth will be difficult to achieve. If so, expenditure growth (ex-waiver) will slowdown materially to ~0-2% YoY in FY18 vs 12% YoY in FY17. If most states go UP’s way, then effectively there may not be any material transfer of income to the households. To that extent, the much anticipated boost to rural spending may only be modest at best. One saving grace could be surprise in Centre’s taxes after GST/DeMon.

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Farm loan waivers: Who benefits, who loses

We have argued that benefits/costs of loan waivers would be shared among 3 participants - governments, financial sector and households - depending on how these waivers are funded. A waiver funded entirely though fresh issuance of debt/expansion in fiscal deficit will be a direct transfer of income to households, thus lifting their spending power. Else, accommodating waiver while sticking to fiscal targets is only possible by rationalising spending in other areas – capex, social sector, etc., and thus will not add up to a stimulus. In both cases, however, banks could be at the receiving end due to deterioration in credit culture.

UP: Waiver accommodated by optimistic revenue projections

In UP, it is clear that the loan waiver is not funded by fresh debt issuance, rather, it is routed through fiscal balance by over-optimistic revenue projections on 2 counts. First, own tax revenue (OTR) is projected to grow ~30% YoY vs 6% in FY17 and 10% average in past 5 years. Even if GST buoyancy is built in, achieving 20% plus growth will be difficult. Second, grants from the Centre are exaggerated. Thus, scope for revenue disappointment is high and therefore expenditure cuts down the line are likely. As per our estimates, expenditure (ex waiver) could slowdown to 0-2% YoY range vs 12% achieved in FY17. One saving grace can emerge if the Centre’s direct taxes surprise positively after GST/demonetisation, which in turn will boost transfers to states.

Conclusion: Loan waivers may not imply net transfers to households

In past 3-4 years, UP has prioritised fiscal targets in the face of revenue shortfall, thus resorting to expenditure cuts. FY18 may not be different given FRBM constraints. This implies that loan waiver will effectively be funded by cutting expenditure elsewhere. If other states also follow UP’s footsteps (media reports suggest that even Maharashtra is looking to rationalise expenditure to fund loan waiver), then there may not be any material net income transfers to the households through waivers. To that extent, the much-anticipated spending boost at rural household level may only be modest at best.

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