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Financing of LOAN WAIVER

Posted on 16 March 2008,    
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FINANCING THE FARM LOAN WAIVER PACKAGE

18:59 IST





Following is the text of the statement on Financing the Farm Loan Waiver Package made by Finance Minister Shri P. Chidambaram in Lok Sabha today.

1. In my budget speech before the House, I had announced a package of debt waiver and debt relief for farmers. It is in paragraph 73 of my speech and it may not be necessary to repeat the same today.

2. A number of Honourable Members have made valuable and important suggestions so that the well-intended debt waiver and debt relief package includes all the deserving farmers, especially the small and marginal farmers. I assure the House that I shall bear in mind every suggestion that has been made during the discussion and try and incorporate some of them, to the extent possible, in the final scheme. Wherever one draws the line, there will be some people who will be at the edge requesting to be included. My intention is to include all deserving farmers and I shall do my best taking into account any compelling circumstance. I may also add that the final package must be affordable; non-discretionary and automatic; and simple and easy to implement at the branch level by the branch manager.

3. I shall now present the broad contours of financing the package.

Size of Relief Package

4. At the request of Government, RBI and NABARD have asked scheduled commercial banks, RRBs and cooperative institutions to submit particulars, branch-wise, of the overdue accounts by March 14, 2008 – that is, today. After RBI and NABARD have examined the data, they have been requested to submit the data to the Government by March 20, 2008.

5. Provisional estimates indicate that the relief to be offered will be around Rs.60,314 crore comprising Rs.50,524 crore of debt waiver to small and marginal farmers and Rs.9,790 crore as relief to other farmers as a one-time settlement (OTS) at 25 per cent of their overdues. Provisional estimates also indicate that about three crore small and marginal farmers and one crore other farmers will benefit if they have overdues as on December 31, 2007.

6. Honourable Members will note that the relief to small and marginal farmers will be about 84 per cent of the total package and the balance of 16 per cent will be the relief to other farmers. In terms of institutions, an estimated 55 per cent of the package will be to borrowers from cooperative institutions; 35 per cent to borrowers from scheduled commercial banks; and 10 per cent to borrowers from RRBs.

7. The above figures are provisional estimates. We will have firm estimates once the complete data is available. Upon receiving the data, we shall immediately authorize an audit of a random sample of branches in order to verify the correctness of the data furnished.

Time Profile of Relief Package

8. As I had indicated in the budget speech, our goal is to finalize the details of the package in consultation with RBI, NABARD and the lending institutions so that the process of debt waiver and debt relief is completed by June 30, 2008. This will ensure that the farmers who will benefit from the debt waiver and debt relief will become eligible for fresh credit immediately thereafter.

9. As far as the lending institutions are concerned, the amounts overdue as on December 31, 2007 would have been recovered, in the normal course, over a period of time. That is our experience in the past. Government has therefore decided that the lending institutions should be provided equivalent liquidity over a period of three years or 36 months.

10. Mr. Speaker Sir, I am happy to announce that the farmers’ accounts will be cleaned up by June 30, 2008. The disbursement of funds to the lending institutions will be spread over a period of 36 months beginning July 2008. Honourable Members will notice that the period of 36 months spans three agricultural years while, at the same time, the period falls within four financial years for the purpose of Government accounts. The three agriculture years are as follows:



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Y1 : 1.7.2008 to 30.6.2009

Y2 : 1.7.2009 to 30.6.2010

Y3 : 1.7.2010 to 30.6.2011

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11. Honourable Members may have been pleased – and, may I add, some skeptics may have been surprised – to note that I have already provided Rs.10,000 crore in the third Supplementary this year itself – what I call year zero. Taking into account what has been provided in year zero, I propose to release – in cash, I repeat, in cash – the compensation to the lending institutions in the following manner:




















Immediately after June 30, 2008, as soon as the first supplementary for 2008-09 is approved by Parliament




Rs.25,000 crore

In Budget 2009-10


Rs.15,000 crore

In Budget 2010-11


Rs.12,000 crore

In Budget 2011-12


Rs.8,000 crore

Total


Rs.60,000 crore



12. In phasing out the package across institutions and over time, we have been and we will be mindful of the need to ensure that all institutions have sufficient liquidity to meet fresh credit demand. In particular, we will frontload the package in favour of cooperative institutions and RRBs which are typically more liquidity constrained than scheduled commercial banks.

13. I am happy and proud that in the third supplementary for this year itself, I have been able to keep aside Rs.10,000 crore to kick start the farmers’ debt relief fund. This has become possible because of higher buoyancy in tax revenues. That we are able to establish the fund in year zero itself, and that too with a substantial contribution, is demonstration of the UPA Government’s determination to ensure that the debt waiver and debt relief package is fully financed and the lending institutions are adequately compensated.

14. Even as the package is spread over three agricultural years, hon’ble Members will kindly note that as much as Rs.25,000 crore will be reimbursed to lending institutions between 1.7.2008 and 30.6.2009 – i.e. within just 12 months. We will disburse a further amount of Rs.15,000 crore by August 2009, thereby completing two-thirds of the relief package in just 14 months.

Sources of Financing the Package

15. Financing of the package should be relatively easy given the buoyancy in revenues and efforts at expenditure restructuring. Since I have been able to find Rs.10,000 crore to establish the fund even in year zero, this will reduce the burden in future years. Given the potential for rapid growth of the economy, the burden in any single year will not be more than 0.25 per cent of GDP. Actually, it will be 0.25 per cent in 2008-09 and will decline in every successive year and will be only about 0.1 per cent in 2011-12. We can also look at this in terms of absolute numbers. The total expenditure projected for FY 2008/09 is Rs.7,50,884 crore. The average annual debt relief burden of Rs.15,000 crore is just 2% of the total expenditure. In future years, the proportion will be even smaller. I am therefore very confident that we can finance a burden of this order as part of the regular budget exercise.



16. The sources of funds to the Government are:



(i) Tax revenues

(ii) Non-tax revenues i.e., dividends, interests, royalties and fees

(iii) Non-debt capital receipts i.e., recovery of loans and advances, premium on the sale of sequestered assets, and initial listing of public sector enterprises

(iv) Additional borrowing, if necessary.



17. The above indicates the hierarchy of the means of finance for the debt waiver and debt relief package. We should be able to finance the package in each year out of the buoyancy in tax revenues alone. If that is not sufficient, we can tap non-tax revenues and non-debt capital receipts in that order. Finally, if even that is not sufficient, there will be enough head room for the Government to borrow. This will, however, be the last resort.



18. Sir, I was somewhat disappointed that many commentators had not quite grasped the significance of pegging the fiscal deficit at 2.5 per cent of GDP, well below the FRBM target of 3 per cent. This headroom opens up many possibilities. And, if in the future too, we peg the fiscal deficit at 2.5 per cent, or even lower, the fiscal space that we will create for ourselves will give us enormous flexibility to incur essential capital expenditure. I am therefore totally confident of the Government’s capacity to finance the package over the next three agricultural years.



Conclusion



19. In conclusion, I wish to reiterate that:



(i) The estimated cost of the loan waiver package is of the order of Rs.60,000 crore subject to figures being firmed up based on data that will be furnished by RBI and NABARD. The number of beneficiaries will be about three crore small and marginal farmers and about one crore other farmers.

(ii) The package will be fully financed through payments in cash during a period of 36 months between July 2008 and June 2011.

(iii) The financing package is largely front loaded. As much as Rs.25,000 crore will be disbursed to lending institutions in July-August 2008 and another Rs.15,000 crore in June-July 2009.

(iv) At less than 0.25 per cent of GDP – and even this will decline every year – the total burden is very much within the manageable limit. The Government is confident of financing the package as part of the regular budget exercise.

(v) Additional borrowing for this purpose will be the last resort. In the unlikely event of resorting to borrowing, it will be well within the FRBM limits.



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