Farm loan waiver to touch 40 billion dollars by 2019: Report

New Delhi, July 7: The need to quell unrest ahead of the crucial general elections next year will result in more farmer- friendly sops, and the farm debt waivers alone will top over $40 billion or 1.5 per cent of GDP, a report said.

"We continue to expect the governments - centre and 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," analysts at Bank of America Merill Lynch (BofAML) said in a note.

The note from the American brokerage comes a day after the newly formed Karnataka government announced a farm loan waiver which will cost up to $5 billion and two days after the centre announced a steep hike in minimum support prices (MSP) for procuring food grains.

In the last few months, there have been debt waiver announcements by the governments in Maharashtra and Uttar Pradesh, among others. The RBI has been opposed to such moves for wrecking credit culture.

BofAML warned that the centre will have to relax its inflation and fiscal deficit targets if it were to achieve its target of doubling farmer income in the five years to 2022.

Moreover, it also recommended regular MSP adjustments if we were to implement the Swaminathan Committee report that insists on ensuring 1.5x returns to farmers for their cultivation.

On the positive side, it said the rural economy- centric measures will help rural demand at a time of stress and a fall in farm income due to poor rains, falling global prices and limited MSP hikes.

Loan waivers of 1.5 per cent will increase the farm incomes by 3 per cent per annum till FY20, it said.

On a flip side, the loan waivers will affect yields as loan growth recovers, it said, adding that the government will have to come up with bonds like the one for the power sector that will securitise banks' farm loans into long-dated non-SLR (statutory liquidity ratio) state paper.

"Banks would swap loans to farmers with state government bonds. Although the FinMin has said that the states have to fund their own farm loan waivers, we see this as scarcely possible without disrupting markets," it said.

It, however, made clear that the inflationary move by Karnataka, of taxing fuels and paying for farm loan waivers, can be replicated nationally.