Farmers' indebtedness is an age-old phenomenon in Indian agriculture which has resulted in high rates of suicide in rural India. In recent times the high rate of suicide coincides with a stagnation in agriculture GDP and two consecutive droughts in 2014 and 2015 which contributed to rising farmer debt. Studies have found higher suicide rates among farmers with small or marginal landholdings.
Governments have responded by trying to increase institutional credit to farmers through various policy measures like multi-agency approach, lead banks, priority sector lending, establishment of rural regional banks, doubling of agricultural credit, interest subvention, kisan credit cards, self-help groups. But despite various actions by government rural indebtedness has increased as it is evident in All India Debt and Investment Survey (AIDIS 2014).
Without considering long-term solutions to deep agrarian distress there has been an intensification of debt waiver schemes both by the central and state governments, especially in the face of elections, to win the votes of poor farmers who constitute more than half of total voters. It can be argued that debt waiver is indeed necessary for farmers hit by drought to lay off their burden because of unforeseen circumstances, but it has very little benefit on the small and marginal farmer majority who mainly rely on non-institutional sources, which charge much higher interest rates and are not covered by such waiver schemes.
Moreover, unlike loan writeoffs for the rich, farm loan waiver schemes have met with heavy criticism of worsening financial discipline in the credit system by creating an unhealthy socio-political environment.
The solution lies in reforms that address structural problems, as rural indebtedness is just a symptom of long-term structural issues that every political party has failed to address. Wide fluctuation in prices received by farmers, fragmented land holdings, low proportion of irrigated lands, lower productivity, poor storage facility, lack of formal credit to marginal and small cultivators, poor crop insurance policy, low public and private investments in infrastructure, low performing non-farm sector etc. are only a few long-term structural problems. The real policy measure lies in addressing these problems by using various instruments to increase rural income and agricultural productivity, which in turn will help lower the burden of indebtedness on farmers.
This paper examines the politics of farm loan waiver and its repercussions on agricultural distress and on agricultural credit. I will try to show how institutional and non-institutional credit has an effect on indebtedness and suicide by small and marginal farmers, by showing their dependency on non-institutional credit.
Loan Waiver and Suicide
Rural indebtedness has been a major reason for growing farmer suicides. Loan waivers are a band-aid solution but are necessary at times to provide some immediate relief to indebted farmers but they help little in solving long-term structural problems that are leading to rising costs and falling profitability in agriculture. They are only an easy solution for politicians to address the issue of rural distress.
Over the past couple of years waivers of farm loans were announced by a number of state governments such as Uttar Pradesh, Rajasthan, Maharashtra, Punjab and Karnataka, Madhya Pradesh, Telangana, Chhattisgarh, and the policy is under serious consideration by the central government.
Those in support of loan waivers argue that such schemes are necessary to revive persistent debt stress faced by farmers following years of stagnancy. They believe in the rational argument of debt hangover hypothesis which argues that once farmers are debt free, they can the revive rural economy through fresh investment.
But at least one study of the central government loan waiver in 2008 (Kanz 2016) showed that beneficiaries tended to have lower investment and less productive farms than non-beneficiaries.
According to a National Crime Record Bureau (NCRB 2014) survey of 13 states with high suicide cases, suicides in agriculture had decreased by 26 per cent from 16,603 in 2000 to 12,360 in 2014. Many have criticised the NCRB data drawn from police records for underestimating farmer suicides, typically by not classifying them as such, but these remain the only comprehensive figures available to the public. Efforts by the central and state governments through various policy measures helped reduce the suicide rate but it is no surprise that the latest loan waiver schemes came to these particular states as they have a high share of farmer suicides.
Maharashtra, Chhattisgarh, Madhya Pradesh and Karnataka are the worst affected states contributing more than 80% of officially recorded farmer suicides in India, so a waiver scheme was no surprise in these states (NCRB 2016).
Most recently, farmer loans have been waived in Uttar Pradesh, Karnataka, Punjab, Maharashtra and Rajasthan, Chhattisgarh, Madhya Pradesh for a total of Rs 1.9 trillion after rising concerns of high farmers' suicides. In most of the states loan waivers were announced just before or after state elections. Uttar Pradesh government promised to waive off loans up to 1 lakh which covers over 86 lakh people; the total amount to be waived was targeted to be 36,400 crores of which the actual disbursal was only 24,700 crores or 32% lower than the promised amount. The Maharashtra government announced a loan waiver scheme amounting to 34,000 crores of which only 17,000 crores has been disbursed. The Punjab and Karnataka governments also announced a loan waiver amounting to a total of 24,000 crores.
The loan waiver policy based on election promises by the Congress in Madhya Pradesh, Chhattisgarh and Rajasthan amounts to 67,000 crores of which 50,000 were crores promised by the Madhya Pradesh government claiming that nearly 55 lakh small and marginal farmers would benefit. Karnataka set a limit of 10,000 crore of which 5,000 crores will go farmers who have borrowed from private banks and 4,000 crores will be allocated to public sector cooperative and regional rural banks. Rajasthan announced a total waiver of 7,000 crores which is to benefit over 19 lakh farmers.
It is widely believed that loan waivers not only reduce indebtedness but also create an environment for fresh loans going towards the agriculture sector, giving farmers the resources to purchase various inputs to start cultivation more effectively. But waiver schemes may actually damage lending from institutional sources to farmers and increase their dependence on non-institutional sources or local moneylenders.
One history of loan waivers in India found a decline in the availability of agricultural loans from cooperative credit societies afterwards (Rath 2008). There were various reasons for this. Governments were not in a position to compensate the credit societies or banks for the write-off at one go; it took a number of years and these institutions still had overdues and were not be able to extend fresh loans. Those who had repaid their dues before the loan waiver felt cheated and were reluctant to repay their fresh loan, which further created pressure for the disbursal of fresh loans from institutional sources.
Incidence of Indebtedness and Sources of Loan
Farmers borrow from both institutional and non-institutional sources to buy inputs and other equipment for cultivation, and expect to pay back when they sell their output successfully. There are several reasons farmers fall into "the debt trap" like crop failure due to inadequate rainfall, pest infection, cropfire, non-realisation of higher output, non-realisation of sufficient price, failure to access markets in time. Without protection from such unforeseen circumstances farmers are left with nothing but a higher outstanding amount to be repaid which causes increased indebtedness.
With increasing, often violent pressure from both institutional and non-institutional creditors farmers see no other option but to take their own life. Farmers who take loans from non-institutional sources have the extra burden of higher interest payments than farmers who can borrow from institutional sources which charge lower interest, or who can benefit from various government incentives.
Size of Land Holding
A 2016 survey by the National Bank for Agricultural and Rural Development on "The Incidence of Indebtedness According to Size Class of Land Possessed" shows higher indebtedness for those with larger landholdings. This can be attributed to the ability of wealthier households to use their assets as collateral against security for loans from institutional sources.
But indebtedness even in lower class of land holding size is high, as marginal and small farmers are highly dependent on non-institutional sources because institutional sources deny them loans citing their inability to provide collateral, and because such loans require complex paperwork.
The study clearly shows that as one moves from smaller to larger landholdings the dependence on non-institutional sources declines, indicating higher dependency of small and marginal farmers on non-institutional loans. Such farmers rely more on non-institutional sources for their credit requirements which charge interest rates in the range of 20-30 percent per year (AIDIS, NSSO 2014) whereas commercial banks and cooperative societies charge interest rates below 10 percent.
The higher burden of interest payments on farmers with marginal or small landholdings, with their lower capacity to earn, translates into higher indebtedness causing higher suicide rates among them.
As can be seen in the table below, among all recorded suicides in 2015-16, 76% were by farmers with small or marginal landholdings. Yet such households account for only 56% of all farming households in the 13 states studied.
Social and cultural issues are also at play in these suicides, as shown in a recent ethnographic study of farmer suicides in Anantapur, Andhra Pradesh by Nilotpal Kumar, published in Unravelling Farmer Suicides in India. To quote from a summary by A.Srinivas in The Hindu:
"The commercialisation of agriculture is leading to break-up of joint families, tensions over sharing of roles within families and a challenge to the authority of the family patriarch in decision-making. The clash of social mores, between 'tradition' and 'modernity', or the old and the young, leads to wounded egos, more so among men; as such, farmers' suicide becomes as much an assertion of patriarchal honour or injured pride as an act of capitulation (as is normally assumed). To the extent that more men than women seem to take their lives in rural India, this is an important dimension."