States to waive USD 40 bln in farm loans by 2019 elections

With Maharashtra following Uttar Pradesh on farm loan waiver, a report by Bank of America Merrill Lynch today warned that USD 40 billion, equivalent to 2 per cent of GDP, will be written off in the run-up to 2019 elections.

“We grow more confident of our call that farm loan waivers will spread across states after Maharashtra followed Uttar Pradesh,” its analysts said in a note.

Underlining that credit culture will be impacted by such populist moves, it estimated the total loans to be waived will be over USD 40 billion or 2 per cent of the GDP by 2019.

Such moves will also be counter-productive to the Reserve Bank’s efforts 18at cleaning up the NPA-saddled bank balance sheets, it warned.

The BJP-led Maharashtra government announced a Rs 30,000 crore debt waiver scheme on Saturday, wherein farmers with less than 5 acres of land will benefit. The move follows a Rs 36,000-crore farm loan waiver in Uttar Pradesh.

The Reserve Bank has been repeatedly raising flag on loan waiver, calling it a “moral hazard”.

“Waivers undermine an honest credit culture…It leads to crowding-out of private borrowers as high government borrowing tend to (impose) an increasing cost of borrowing for others,” Governor Urijit Patel has said earlier.

Analysts at the brokerage said even though the Centre has said that the states will have to make provisions for themselves, the Ministry of Finance will have to take care of it by floating bond instruments similar to Uday scheme.

“Although the MoF has said that states have to fund their own farm loan waivers, that is scarcely possible without disrupting bond markets,” it said.

UPA government had announced an over Rs 60,000 crore debt waiver for the agricultural sector in 2008.