“The banks will lend the additional money, this in turn might contribute to rising inflation,” said Professor Abhirup Sarkar of the Indian Statistical Institute (ISI).

Sarkar was speaking on the sidelines of the Union Budget seminar organised by PricewaterhouseCoopers (PwC) Pvt Ltd on Saturday. He added that in order to write off debts, the government will have to increase the supply of money in the economy. According to S Radhakrishnan, president of the Bengal Chamber of Commerce and Industry (BCCI), this move will not have a far-reaching effect, since most farmers were outside the purview of formal credit.

To this, Sarkar said the problem in rural India was that a large part of small and marginal farmers’ borrowings came from moneylenders in the unorganised sector.

“The money to fund the Rs 60,000-crore outlay is likely to come from the industry through different revenue mechanisms,” said Somnath Ballav, PwC’s executive director (tax and regulatory services). He added, “The government has clearly set its sight on the ensuing elections as they have set a June 30, 2008 deadline for the loans to be waived, realising that elections can happen any time after that.”