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Is Loan Waiver a Panacea for Rural Distress?

On the eve of elections in India, farm loan waiver became one of the major election promises. Recently, the winning Janata Dal party in the state of Karnataka, India fulfilled its pre-poll promise and announced a farm loan waiver of up to $4.79 billion (with a cap of $2,817 per family). Starting last year, Karnataka is the fifth state (after Uttar Pradesh, Punjab, Maharashtra, and Andhra Pradesh) to have implemented farm loan waiver programmes. Another poll-bound state Rajasthan also announced farm loan waivers, while in Chhattishgarh, the main opposition party Indian National Congress promised farm loan waivers if voted to power. As a result of farm loan waivers, there is a likelihood that during fiscal 2018-2019, India’s fiscal deficit may widen to $16.17 billion. During 2016-17, the total amount of debt relief programmes announced by governments of Uttar Pradesh, Maharashtra and Punjab amounted to $10.85 billion or 0.5% of India’s GDP in 2016-17 (Kundu, 2017). If all the states in India were to waive 50% of their farm debt, it would cost 1% of India’s GDP (in 2016-17 prices).

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