New Delhi: Following Karnataka’s $5 billion write off, the nation’s farm loan waivers will double to $40 billion by the summer 2019 elections, says a Bank of America Merrill Lynch (BofAML) report.

Karnataka chief minister H. D. Kumaraswamy in the maiden budget of the Congress-JDS coalition government on Thursday announced a mega Rs34,000 crore farm loan waiver scheme.

He capped the agricultural loan to be written off at Rs2 lakh and added that all defaulted crop loans up to 31 December, 2017, will be written off in the first phase.

According to global financial services major, the governments of both—Centre and States—are expected to take proactive steps to quell rural unrest in the run up to the 2019 elections.

“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 of up to Rs2 lakh," the report said.

The report further noted that farm loan waivers, along with minimum support price (MSP) hikes, will support rural demand at a time of stress; however, rains are a swing factor.

“If farm loan waivers really amount to about 1.5% of gross domestic product (GDP), this should effectively raise farm income by about 3% a year over FY18-20," the report said.

Moreover, the rise in MSP will raise autumn kharif harvest farm income by 10% in this fiscal. 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.

“In our view, it is very difficult for the current government to achieve its objective of doubling farmer incomes by 2022 unless it relaxes its inflation and fiscal deficit targets," it added.

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