Saturday, March 01, 2008

India waives loans to poor farmers in annual budget ahead of likely elections

India's government announced plans to cancel poor farmers' debts and ease the tax burden on the average Indian, unveiling a budget on Friday that may be the current administration's last before national elections are held.

Polls must be held by May 2009 at the latest. But deep disagreements between the Congress party, which leads India's governing coalition, and its communist political allies have led many here to assume an election will take place sooner, possibly later this year.

The budget, for the fiscal year beginning April 1, seemed certain to fuel such speculation. It contained a heavy dose of populist measures, including debt relief for millions of farmers and increased spending on employment schemes, education, irrigation projects and insurance packages for poor.

Finance Minister P. Chidambaram said in his budget presentation to Parliament that the government would write off loans due on or before Dec. 31, 2007, to small farmers with land holdings of up to 2 hectares (5 acres).

The move is expected to benefit about four million farmers.

The loan write-off by state-owned lenders would cost an estimated 600 billion rupees (US$15 billion; €10 billion), Chidambaram said, adding that the plan should be fully enacted by June.

India's stock markets fell on news of the government proposal to waive the debt of small farmers.

The Bombay Stock Exchange's 30-share Sensex index was 1.4 percent lower at 17,579 points at the provisional close.

On the broader National Stock Exchange, the 50-company S&P Nifty index dipped 1.2 percent to 5,224 points at provisional close.

Two-thirds of India's 1.1 billion people depend on agriculture, and most have been left out of India's economic boom. While the country's economy is expected to grow 8.7 percent this year, agriculture is expected to grow 2.6 percent. In parts of western and southern India, the dire economic state of farmers has been blamed for thousands of suicides in recent years.

Chidambaram also increased the annual level at which income will be taxed to 150,000 rupees (US$3,750; €2,480) from 110,000 rupees (US US$2,750; €1,820), letting millions off the tax hook.

"Income tax payers have made a most persuasive case for some relief," he said.

Political commentator Kuldip Nayar said the budget was the finance minister's attempt to "placate as many people as he can."

"All of these measures show that this is an election year," said Nayar.

Chidambaram also said that the government proposes to spend 1.05 trillion rupees (US$26 billion; €17 billion) on the defense sector in the next fiscal year, up 10 percent from the current defense budget.

India's 1.3 million-man army is one of the world's largest but is hampered by outdated equipment _much of it Soviet era relics. To remedy this India has gone on a major arms buying spree in recent years.

The government also aims to cut the fiscal deficit — the gap between what the federal government earns and spends — to 2.5 percent of the gross domestic product next year. In the current fiscal year ending March, the deficit is estimated at 3.1 percent of GDP, below the government's earlier target of 3.3 percent.

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