Mumbai: The country's farm loan waivers will double to $40 billion (Rs 2.7 lakh crore) by the 2019 general elections, Bank of America Merrill Lynch (BofAML) forecast on Friday.
The projection comes a day after Karnataka chief minister H. D. Kumaraswamy announced a Rs 34,000-crore farm loan waiver wherein individual agricultural loans up to Rs 2 lakh will be written off.
The global financial services major said in a report that the governments, both at the central and state levels, are likely to take active steps to control rural unrest ahead of the 2019 polls.
"We grow more confident of our call that farm loan waivers will double to $40 billion by the summer 2019 elections after the Karnataka government wrote off $5 billion of farm loans up to Rs 2 lakh," the report said.
It added that these farm loan waivers, along with minimum support price (MSP) hikes, will support rural demand at a time of stress. However, the monsoon will remain a swing factor.
On Wednesday, the Centre had raised the support prices for 14 kharif crops.
Among them, the minimum price for paddy was increased by Rs 200 per quintal.
Farm income
According to BofAML, farm income growth has been subdued in recent years because of poor rains, falling global prices and limited MSP hikes. It pointed out that if farm loan waivers amount to about 1.5 per cent of the gross domestic product, these moves should effectively raise farm income by about 3 per cent a year over 2018-20.
"Wednesday's hike in MSP prices should also push up rural demand, especially by raising the income of raw cotton farmers. We estimate that this will raise autumn kharif harvest farm income by 10 per cent in 2018-19 in contrast to a drop of 4.5 per cent last year. With rains stalling in June, sowing is running at 22 per cent below last year," it added.
According to BofAML, the government will have to adjust the MSPs regularly to avoid a large one-time course correction as seen on Wednesday to implement the Swaminathan formula of setting the support prices at 1.5 times the cost.
Impact watch
However, farm loan waivers will impact yields as loan growth recovers.
Accordingly, "farm loan waivers need to be funded by UDAY-type bonds that will impact yields when loan growth revives", it noted.
"We continue to expect the governments - the Centre and the states - to take proactive steps to quell rural unrest in the run-up to the 2019 elections. It is for this reason we see farm loan waivers rising to $40 billion by then. In our view, it is very difficult for the current government to achieve its objective of doubling farm income by 2022 unless it relaxes its inflation and fiscal deficit targets," it observed.
While the Reserve Bank of India (RBI) has often frowned upon farm loan waivers, the fear is that in the case of Karnataka, the decision will restrict its ability to control expenditure.
India Ratings has said in a note that higher growth in revenue expenditure than revenue receipts is likely to reduce the fiscal space for the government to augment capex, affecting the state's medium-to-long-term growth prospects.
