Farmers whose debt is waived will become eligible for fresh credit after June 30, by which time the relief package will have been completed.
Announcing the broad contours of the Rs 60,000-crore (Rs 600 billion) farm loan waiver package, the biggest loan relief in India's fiscal history, Finance Minister P Chidambaram said he was "totally confident of the government's capacity to finance the package over the next three agricultural years".
In a strongly-worded speech that addressed his colleagues in the Congress as much as the opposition, the finance minister also promised that the package will be implemented at the ground level by bank branch managers in a non-discretionary manner.
"The relief to small and marginal farmers will amount to nearly 84 per cent of the total package, with the balance for other farmers," Chidambaram added.
The government has, for the time being, retained the package size at Rs 60,314 crore (Rs 603.14 billion), but Chidambaram said these provisional figures could be revised once the Reserve Bank of India and National Bank for Agriculture and Rural Development, the apex refinance bank, submit branch-wise details of overdue accounts by March 20, 2008. Random audits of sample bank branches will be conducted to verify the data.
"Provisional estimates indicate that the relief will comprise Rs 50,524 crore (Rs 505.24 billion) on account of debt waiver to small and marginal farmers and Rs 9,790 crore (Rs 97.90 billion) as relief to other farmers as a one-time settlement at 25 per cent of their overdues," Chidambaram said.
As expected, the government has decided to compensate lenders --cooperatives, regional rural banks (RRBs) and scheduled commercial banks -- in cash within three agricultural years starting July 1, 2008, and ending June 30, 2011.
The compensation is front-loaded, with nearly 42 per cent of the entire amount (see table) being released to the institutions immediately after June 30 this year when the first supplementary demands for grants for 2008-09 are approved by Parliament.
The package is frontloaded in favour of cooperative institutions and RRBs, which typically have more liquidity constraints than scheduled commercial banks, Chidambaram added.
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.
The package will be financed as part of regular budget exercise, through tax and non-tax revenues. Chidambaram stressed that the government would borrow funds for the package only as a "last resort".
The finance minister added that the fiscal burden in any single year would not be more than 0.25 per cent of GDP. "In 2008-09 it will be 0.25 per cent, declining every successive year to about 0.1 per cent in 2011-12," he said.
Based on expenditure of Rs 7,50,884 crore (Rs 7508.84 billion) in 2008-09, the average annual debt relief burden is Rs 15,000 crore (Rs 150 billion) or 2 per cent of total expenditure. In future years, the proportion would be even smaller.
Chidambaram also said the government would finance the package from buoyant tax revenues and, if required, from non-tax revenues as well as non-debt capital receipts. If there was any shortage thereafter, the government would borrow money, he said.
The finance minister did not, however, incorporate suggestions for expanding the loan waiver to dryland farmers and those with bigger holdings proffered by party MP Rahul Gandhi but promised to consider such suggestions.