K'taka's farm loan waiver can push up fiscal deficit

Farm loan waiver to the tune of a whopping Rs 47,000 crore by the Karnataka government has come at the cost of its capital expenditure and is likely to shoot up its fiscal deficit in 2018-19, a Fitch group company India Ratings said on Thursday.

The rating agency's forecast comes a day after Chief Minister H. D. Kumaraswamy wrote to Finance Minister Arun Jaitley seeking GST compensations to Karnataka be extended by three years to 2025 as it was hit by a severe revenue deficit of around 20%.

The farm loan waiver in the Karnataka has led to a sharp rise in its revenue expenditure and to offset the impact, the state government reduced its capital expenditure by 2.5% in fiscal 2018, Ind-Ra said, adding it will adversely impact the state's finances in fiscal 2019 as well.

The fiscal deficit will most likely shoot up as it did in 2018 and capital expenditure could be cut to control the deficit. Karnataka's fiscal deficit took a hit and rose to 2.8% from the budgeted 2.6%, the rating firm said.

“During periods of fiscal adjustment, like the one that is bound to arise due to farm loan waivers, capital expenditure becomes a soft target for deficit control,” it said.

State government capital expenditure is a major driver of investment growth in the Indian economy, and historically, it has been higher than CapEx undertaken by the central government. It is budgeted to be higher by 37.5% for fiscal 2019.

Making similar prognosis about other major crop loan waiving states such as Maharashtra and Rajasthan, the rating firm urged policymakers and companies investing in India to focus more on the state governments’ budgets than that of the Centre.

A study by the Reserve Bank of India too has flagged concerns over farm loan waivers by states saying waivers could alleviate the immediate debt burden of financially distressed farmers as those were essentially a transfer from taxpayers to borrowers with an adverse bearing on the fiscal viability of states.