Farm loan waivers will amount to 2 per cent of GDP by 2019 polls as other states may follow BJP's Maharashtra and UP governments, says a Bank of America Merrill Lynch report.
"We expect almost all States to write off about $0 billion of farm loans in the run up to the 2019 general elections following the ruling BJP's UP and Maharashtra governments' waivers," BofAML said in a research note.
This covers bank loans to farmers with up to 5 acres of land.
The report said the Ministry of Finance will have to fund farm loan waivers by UDAY-type bonds to limit market impact.
On 3 June, the Maharashtra government waived loans of Rs.300 billion/0.2 per cent of GDP owed by farmers with up to 5 acres of land by October. Earlier, in April, the UP government had announced a Rs.360 billion/0.3 per cent of GDP farm loan waiver.
The Indian economy is expected to see a consumption driven growth rather than investment and farm loan waivers is likely to add to this trend by stimulating rural demand.
Three other factors- lower lending rates, 7th Pay Commission Award and better monsoons-are expected to aid consumption driven economic growth.
Regarding RBI's monetary policy stance it said the Central Bank is expected to go for a 25 bps rate cut in its policy review meet on August 2 as GST rates are not inflationary.
"We grow more confident of our contrarian call of a 25 bps RBI rate cut on August 2. While a higher GST rate for textiles may push up CPI inflation at the margin, GST rates, overall, are unlikely to be inflationary as the RBI MPC had feared," the report noted.
The Reserve Bank in its monetary policy review meet on April 6 kept the repurchase or repo rate-at which it lends to banks-unchanged at 6.25 per cent, but increased reverse repo rate to 6 per cent from 5.75 per cent.
RBI's next policy review is scheduled this week.