Bengaluru: Karnataka chief minister H.D. Kumaraswamy on Sunday directed his administration to cut down on all “unnecessary expenditure", including reviewing proposals to buy new cars, refurbishing and renovating government offices or residences, to help strengthen the state’s finances.

In other words, the CM was asking the bureaucracy and his party colleagues to brace for the impact of a likely 53,000 crore farm loan waiver, albeit in phases.

However, economists and political analysts say that though “extreme austerity" measures could help in a small way, it would cripple, not just the economy, but also agriculture support infrastructure, such as power and irrigation, apart from slashing budgetary allocations to sectors including education, health and other essential services.

The Congress, which had conceded the finance portfolio to its smaller coalition partner, Janata Dal (Secular), among other plum portfolios, may now find little money to fulfil its pre-poll promises and, instead, let its regional ally stick to its own election manifesto first.

Adding to Kumaraswamy’s woes, however, is the farmers’ demand not just for a loan waiver, but to make them debt-free—a proposition that comes with a price tag of 1.15 trillion, or over 50% of the state’s entire budget of 2 trillion.

“This will affect the economy adversely and other sectors will suffer," said Abdul Aziz, economist and chair professor, National Law School of India University.

Drought-prone Karnataka has one of the highest rates of farm indebtedness among agricultural households, which form around 77% of the state’s rural population. The national average is at 52%, shows a PRS Legislative Research study, based on 2013 data.

“A debt-free farmer does not come from writing off loans," said Narendar Pani, a political analyst and faculty at the National Institute of Advanced Studies.

Though the first phase of the proposed loan waiver will look at easing the debt of small and marginal farmers, the community is now making requests for even bigger financial benefits, which include pledged gold, automobiles, hypothecation of farm land and even credit taken for weddings.

If the CM obliges, it could set a wrong precedent for farmers from other states to follow, given the agrarian crisis across India following prolonged droughts, falling agri-commodity prices and shortage of water.

In 2016-17, banks had disbursed 9,59,826 crore (provisional as on 28 February 2017) credit to the agriculture sector, including agriculture and allied, agri-infrastructure and ancillary activities, against a target of 9,00,000 crore. Commercial banks, regional rural banks (RRBs) and cooperative banks disbursed (provisional) 7,33,201 crore, 1,03,974 crore and 1,22,651 crore, respectively, according to the 2016-17 annual report by National Bank for Agricultural and Rural Development.

Apart from vetting legitimate claims by genuine farmers, the government’s proposal is also focused only on institutional credit. The PRS legislative study states that marginal and small farmers account for around 82% of all indebted households in India and 56% of the outstanding loans by value.

However, at least 62% of this section borrow from informal sources such as moneylenders, family and friends.

Ravikiran Punacha, a farmer leader from Dakshina Kannada district, at a recent meeting with the chief minister, pointed out that borrowing from institutional sources and lending it out at a higher rate in the informal sector was a problem that needed to be dealt with as it denied credit to genuine farmers, who have no access to these funds nor will be included in the waiver programme.

“Since there is no disincentive to borrow, the scope for debt will actually increase," said Pani.

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