If farmers’ loans are waived in India, how will it affect the aggregate demand in the economy? L. Private consumption impact via increase in private sector net wealth 2. Public sector impact via changes in government expenditure / taxes 3. Crowding-out impact via higher borrowings by State Governments 4. Crowding-in impact via higher credit availability as bank NPAs fall Select the correct answer using the code given below.

Farm loan waivers impact aggregate demand through four primary channels as identified in the Economic Survey 2016-17. First, they increase the net wealth of farm households, which can stimulate private consumption. Second, they affect the public sector as governments must adjust expenditure or taxes to accommodate the fiscal burden. Third, a 'crowding-out' effect occurs when state governments increase borrowings to fund waivers, leading to higher interest rates and reduced private investment [1]. Fourth, a 'crowding-in' effect may occur because waivers can reduce bank Non-Performing Assets (NPAs), potentially improving bank balance sheets and increasing credit availability for the economy. While the net impact on aggregate demand is often deflationary due to fiscal constraints and reduced state spending in other areas, all four mechanisms are theoretically valid channels through which the waiver influences the economy.

Sources

1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Crowding Out > p. 117