India's northern Punjab state will waive more than $1.5 billion in loans to farmers, becoming the third state to do so in response to growing rural distress caused by food oversupply and weak prices.
The South Asian nation is carrying a huge inventory of food grains from last year's record harvest, while exports have been hit by an appreciating rupee, falling global prices and restrictions on overseas shipments.
Punjab will waive loans to farmers with holdings of up to 5 acres and debts of up to Rs200,000, state finance minister Manpreet Singh Badal said.
About 975,000 farmers will be completely debt-free after the scheme is implemented. Punjab, a major producer of wheat and rice, will settle farmers' debts to the banks through annual budget provisions, he said.
"Every year we will make a provision of about Rs20-30 billion in the budget to pay to the banks, so that the entire loan is paid in five years," Badal said.
Indian police block farmers as they march towards the residence of Cabinet Minister Bikram Singh Majithia during a protest in Amritsar on December 19, 2016 AFPReserve Bank of India Governor Urjit Patel has warned that such loan waivers, forecast by BofA Merrill Lynch to reach $40 billion, would weaken already-strained state finances.
"The economy is not just about state finances, we also have to take care that our farmers do not commit suicide," Badal said in a telephone interview.
To pay off the loans, Punjab is banking on a 14% rise in state revenues after the July 1 launch of a new national Goods and Services Tax (GST). It is also planning to cut some of its capital investments.
"The total loan to be absorbed by the state would be around Rs80bn-Rs100bn," he said.
Earlier the western state of Maharashtra and Uttar Pradesh in the north, ruled by Prime Minister Narendra Modi's Bharatiya Janata Party (BJP), agreed to forgive billions of dollars in farm loans.
Punjab is one of a handful states ruled by the opposition Congress party.
Economists at Merrill Lynch estimate that states will end up writing off debts equivalent to 2% of GDP, the bulk of all outstanding loans to farmers.
