By Vipin Das M
NEW DELHI (Reuters) - 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 (2 hectares) and debts of up to 200,000 rupees ($3,100), state finance minister Manpreet Singh Badal told Reuters.
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 20-30 billion rupees in the budget to pay to the banks, so that the entire loan is paid in five years," Badal told Reuters.
Reserve 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 percent 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 80 billion-100 billion rupees ($1.24 billion-$1.55 billion)," 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 percent of GDP - the bulk of all outstanding loans to farmers.
(Reporting By Vipin Das M and Nidhi Verma; Writing by Nidhi Verma; Editing Douglas Busvine and David Evans)