Farm Loan Waiver (FLW) – will the domino effect continue?


  • UP, Maharashtra, Punjab and Karnataka have recently announced FLW packages for small farmers, totaling around INR 1.02tn. This has raised concerns around fiscal deterioration at the state level, and has kept both Bond & Equity investors occupied with questions surrounding the reasons for the current FLW demands, which other states can follow suit and the overall impact of a large scale FLW on financial markets.
  • Citi economist estimate that a few more states may announce similar FLW schemes despite the strong farm income growth in FY17, after two draught years of FY15 & FY16. Even though there doesn't seem to be a generalized farmer distress in FY18, however the recent fall in food prices, increasing cost of production, uncertainties around government procurement and the demonstration effect of the recently announced FLWs, may lead some more states to bite the bullet. Citi economists identify 9 states which are potential candidates for FLW schemes in FY18.
  • Farmer Indebtedness1 vs Agriculture income2 across states(Rs)

    Source: Citi Research, RBI, CEIC, CSO. 1 Farm debt per indebted person, 2 Agri income estimated as agriculture GVA of state per unit rural population.

  • UP, Maharashtra, Telangana, Karnataka, Kerala, Andhra, Tamil Nadu, Madhya Pradesh & Rajasthan have similar farm debt/income profiles and are potential candidates for announcing FLWs.
  • Citi Economist estimate that in aggregate, around 1.5% of GDP worth of farm debt could be waived if all these states announce FLW, however given the complexities in actual disbursals, the fiscal impact may get limited to 0.4% of FY18 GDP. They also believe that while the growth impact of such FLWs is likely to be muted, however the impact on rural inflation needs to be closely monitored. In their view, any risk of consequent large fiscal slippage would limit RBI’s ability to ease substantially.
  • On Equities, Citi Analysts expect some impact of FLW on the financial sector, that is dependent on the total quantum of FLW (Central & State level) and also on the mechanics/timeline of the funding/distribution. FLWs also have a second order impact on credit culture and willingness-to-pay related issues, affecting rural NBFCs and MFIs



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