India's ruling Bharatiya Janata party is preparing to waive billions of dollars in farmers' loans, as it confronts an upsurge of unrest from angry cultivators who are demanding debt relief and higher prices for agricultural commodities. Six farmers have already been killed in confrontations.
In a note to clients this week, BofA Merrill Lynch predicted nearly $40bn in farmers' debts - equivalent to around 2 per cent of GDP - would be waived before India's next general election in 2019, when Prime Minister Narendra Modi hopes to secure a renewed mandate for the following five years.
Mr Modi opened the floodgates for a series of costly farm loan write-offs during the recent Uttar Pradesh election campaign, when he promised that the BJP would forgive nearly $5.6bn owed by more than 21.5m small farmers if it came to power. Yogi Adityanath, the state's newly anointed chief minister, moved to fulfil that promise at his first cabinet meeting.
Now, the demand for debt relief has spread across rural India, where livestock markets have also been roiled by new rules to restrict the sale of aged bovines for slaughter.
In Maharashtra - also governed by Mr Modi's Hindu nationalist BJP - protesting farmers have withheld produce from the markets for nearly six days, leading to shortages and sharp increases in the prices of fruit, vegetables and fresh milk in cities such as Mumbai and Pune.
In response, Devendra Fadnavis, Maharashtra's chief minister, has promised to write off loans equivalent to $4.6bn owed by farmers with up to five acres of land by October 31.
In neighbouring Madhya Pradesh - where farmers are also demanding loan waivers, protests demanding debt forgiveness turned violent as rampaging farmers set cars on fire and attacked police stations.
In the confrontations six farmers were shot and killed and eight others injured. Farmers have accused police of shooting into the crowd, a charge the state's BJP government initially denied but later conceded could be true - but which it justified on the grounds of self-defence.
The BJP government in Madhya Pradesh has promised financial compensation for those killed in the violence and has said it is ready to hold talks with farmers' groups.
In the southern state of Karnataka, the BJP, which is in opposition, is publicly demanding that the Congress administration waive farmers' loans before the state's next elections in 2018.
Farmers' debt write-offs have a long and controversial history in India. In 2008, India's previous Congress-led government waived farm loans equivalent to 1.8 per cent of GDP. The waiver was criticised by some agricultural economists as a populist measure that failed to address farmers' real problems or sustainably boost their productivity or incomes.
The recent Uttar Pradesh farm loan waiver was also criticised by Urjit Patel, the current Reserve Bank of India governor, who warned that the move would inflict long-term damage on India's economy, erode public finances, undermine public credit culture and raise expectations of future loan write-offs in other states.
"I think we need to create a consensus that such loan waiver promises are eschewed," Mr Patel said, days after Yogi Adityanath approved the loan waiver in UP. "Otherwise, sub-sovereign fiscal challenges in this context could eventually affect the national balance sheet."
According to Moody's, the credit rating agency, the budget deficits of India's cash-strapped state governments are a mounting challenge, with their deficits having risen from 2 per cent of GDP in 2012 to 3 per cent now - in addition to the central government deficit.
In its note, BofA Merrill Lynch said it expected the farm debt waivers to be financed by the central government, which would help the states to issue special bonds.
Copyright The Financial Times Limited 2017
