Farm loan waivers will spread across States after Maharashtra followed Uttar Pradesh in waiving such loans on Saturday, according to Indranil Sen Gupta, Economist, Bank of America Merrill Lynch.

The Maharashtra government has waived ₹30,000 crore of loans owed by farmers with land up to five acres. In April, the Uttar Pradesh government wrote off loans worth ₹36,000 crore.

2% of GDP

Sen Gupta said in a report that the amount of farm loans that will eventually get waived could be as high as $40 billion (₹2.6 lakh crore), or roughly 2 per cent of the GDP, in the run up to the 2019 general elections.

The UPA government had waived off farm loans worth 1.3 per cent of GDP in 2008.

Sen Gupta felt that the Finance Ministry will eventually have to come up with a UDAY bond-type solution that will securitise banks’ farm loans into long-dated non-SLR state government paper.

He said that this will impact credit culture, although a good part of farmer debt arose on rural stress from poor harvests. It would also prove counter-productive to the RBI measures to clean up bank balance-sheets, he said.

“On balance, farm loan waivers support our standing call of playing consumption over investment as they will help to stimulate rural demand, especially if monsoons water a good crop,” he said in the report.