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Will pledge future revenue to raise money for farm loan waiver scheme: Chandrababu Naidu

Naidu, perceived as a reform-minded chief minister, announced that his state will mobilise Rs 37,900 crore to fulfil the loan-waiver promise.

, ET Bureau|
Jul 22, 2014, 03.00 AM IST
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Naidu, perceived as a reform-minded chief minister, announced that his state will mobilise Rs 37,900 crore to fulfil the loan waiver promise.
Naidu, perceived as a reform-minded chief minister, announced that his state will mobilise Rs 37,900 crore to fulfil the loan waiver promise.
HYDERABAD: Andhra Pradesh has said it will pledge future revenue to raise money for a farm loan waiver scheme, an unusual move for a state government, particularly because it is intended to fund a populist promise.

Chandrababu Naidu, perceived as a reform-minded chief minister, announced that his state will mobilise Rs 37,900 crore to fulfil the loanwaiver promise but stressed that the decision does not mean he will lapse into populism.

Naidu, known for initiating economic reforms during his tenure from 1995-2004 as CM of undivided Andhra Pradesh, said on Monday that his decision is one-off primarily aimed at making agriculture a profitable occupation. He pledged to continue with economic reforms. “(they) are needed for wealth creation and revenue generation even to take up welfare programs. However, there is a need for fine balance between the two,” Naidu said.

But the step is attracting criticism from some public finance experts who believe it will prove to be counter-productive. Ajay Shah of the National Institute of Public Finance and Policy, said: “There is no free lunch and it would hurt the interests of existing bond-holders. Financial engineering can never create value. All it can do is only shifting cash flows from one form to another.” In any case, the state government will have to obtain the approval of both the central government and RBI to raise funds even through securitisation, said Shah.

Naidu said the future revenue earnings to be securitised would include streams like mineral mining, sand mining, transport and excise apart from forest produce like red sandal wood. Nearly 80 lakh farmers in the state will benefit to the tune of Rs 1.5 lakh a family, he said.

The chief minister said his government was forced to come up with the securitisation plan as the Reserve Bank of India was not in favour of the state’s proposal to reschedule farm loans by seven years so that government pays later. The fiscal responsibility and budget management (FRBM) Act was also coming in the way of the state borrowing more than Rs 27,000 crore. The modalities of the fund mobilisation such as the rate of interest, tenure, quantum and timing will be firmed up in the coming weeks.

Rajesh Chakrabarti, associate professor of public policy at Indian School of Business, Mohali, described Naidu’s securitisation plan as a “a bad idea that may not in reality remains one-off and could only lead to a bad precedent for loan waivers in future.” He hoped that the tenure would not exceed five years, which is the term of the government. “In the process, Naidu is mortgaging the future of the state.”

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