The Seeds of Debt: Are Loan Waivers a Solution for Credit Crisis in Indian Agriculture?

Indian agriculture needs strategic intervention and reforms to help debt ridden farmers. MOIN QAZI argues that loan waivers are an inefficient solution to the endemic system of credit in Indian agriculture that lead to suicides by farmers.

His speech is of mortgaged bedding,

On his kine he borrows yet,

At his heart is his daughter's wedding,

In his eye foreknowledge of debt.

He eats and hath indigestion,

He toils and he may not stop;

His life is a long-drawn question

Between a crop and a crop.

–Rudyard Kipling

India's farm distress has now reached a new flashpoint with hundreds of thousands of farmers protesting around the national capital against the three farm bills. Any impartial observer who understands India's farming distress would normally agree that Indian farmers require solutions to their fundamental problems and not any grandiose reforms.

Economic reforms and the opening of agriculture to the global market over the last three decades have made small farmers vulnerable to unusual changes and fluctuations.

Small growers now have to compete with larger ones, who are well-endowed with capital, irrigation facilities and supplementary businesses to buffer them against any shocks. As a fallout, peasants are facing what has been called a "scissors crisis", which is driven by the rising cost of inputs without a commensurate increase in output price.

Cycle of Borrowings and Debt

Small farmers are denied access to institutional credit because they lack formal documentation and adequate security. Most of them depend on village traders, who are also moneylenders, to give them crop loans and pre-harvest consumption loans. Credit histories and collateral may serve to qualify middle-class customers for loans, but most rural smallholder farmers have neither.

Peasants take loans from moneylenders at exorbitant rates of interest in order to buy expensive transgenic seeds and high-cost fertilisers that allow them to merely feed themselves and their cattle.

They hope for better yields in the future but this time never quite comes.

Eventually, many farmers find themselves in a debt trap as they keep pursuing the vain mirage of a golden crop bonanza.

Owing more than they earn, the steadiest of these workers have become gamblers at the highest of stakes, betting their land and their lives on a better crop.

Indebtedness is a problem that is most acute among small and marginal farmers.

Farmers are often pushed into an endless cycle of debt because of unpredictable weather, high input costs, poor soil and pest management, and market fluctuations.

But their borrowings are mainly from moneylenders and hence loan waivers won't make any difference to them. In reality, bigger farmers are the main beneficiaries of debt relief policies.

In a sense, this is a story of unfinished reforms in India.

The question should be why almost 55 percent of the population produces just 15 percent of agricultural output. Unless this huge swathe of the population is empowered, loan waivers will remain a recurring feature of the landscape.

Need to examine reasons for farmers suicides in depth

Large swathes of farms have been the epicenter of a debt crisis that has gripped the rural population.

As debt mounts, many growers are now making a permanent escape from the physical and emotional pain by ingesting deadly pesticides.

For years now, this crisis has driven thousands of farmers to take their own lives. These suicides are not merely a loss of human lives; they are debilitating scars on our nation's development canvas.

While debates continue to rage on reforming the agricultural sector to improve the economic conditions, no attempt has been made to examine the possible psychological implications of economic stress that may lead to suicides.

For every cultivator who takes his own life, a family is hounded by the debt he leaves behind, typically resulting in children dropping out of school to become farmhands. Farmers' suicides have to be tackled on several fronts and addressing mental health problems is just one of them but it is certainly a major part of the solution.

The lack of focus on marginal and sub-marginal farmers, tenants, sharecroppers, oral lessees and non-cultivator households has further compounded the agricultural conundrum.

Farmers Woes are Connected to 1991 Reforms

We need fresh thinking on strategies for mitigating risk, enhancing productivity and income and strengthening market linkages for businesses and farmers for better profits.

Simplifying mortgage requirements and procedures, rationalising stamp duty for loans to small and marginal farmers and providing agricultural and business extension services in the farm and non-farm sectors respectively can go a long way towards providing resilience to the agricultural community.

To improve their lives, farmers need a way out of agriculture and into the manufacturing or services sector. In fact, most small-scale farmers would happily sell their land if only they could be provided alternate employment.

The main source of India's developmental failure since 1947 has been its inability to move the huge mass of people involved in agriculture into industry and the services sector. As the share of agriculture in the national output falls, any crisis hurts those dependent on agriculture disproportionately.

A decade ago, the government embraced the global marketplace and began cutting farm subsidies as it liberalised its socialist economy.

The farmers' costs rose as the tariffs that had protected their products were lowered.

Many farmers switched to new genetically engineered seeds that were resistant to deadly pests and produced far higher yields and healthier crops with less use of pesticides. The engineered seeds can be more productive. However, they can be as much as three times more expensive to maintain than traditional seeds.

A safety-net for Farmers to Mitigate Risks

Small farmers lack risk mitigation tools.

A crop failure, an unexpected health expense or the marriage of a daughter are perilous to the livelihood of these farmers. An adverse weather change, for example, can lead to a drastic decline in output and the farmer may not be able to recoup the costs of planting. Sometimes, farmers have to attempt to plant seeds several times because they may be destroyed by delayed or excess rain.

The problem has depressed yields and rural consumption nationwide – a heavy economic drag on a nation where two-thirds of the population still lives in the countryside.

The superior bargaining power of village traders and the middlemen means that the prices received by farmers are low. On account of the small size of the farms, they can rarely apply technological solutions that work best on a large scale. With government extension workers not properly trained, small farmers do not have access to knowledge about best practices, for example, crop rotation techniques to help reduce pests.

The risk levels of farmers need to be mitigated through watershed development, soil and water conservation, risks can be reduced by proper herd management practices and mass vaccination against measures, installing protective irrigation and by using appropriate agronomic practices all the way from ploughing techniques to seed selection and timely farm operations.

Loan Waivers are both "Bad Politics" and "Bad Economics"

Indebtedness is the most acute problem faced by small and marginal farmers. However, their borrowings are primarily from moneylenders and hence a loan waiver is not going to make any sense for them.

It is the richer farmers who are the real beneficiaries of such populist policies.

Debt relief programmes fail to provide assistance to landless farmers, who do not have access to bank loans and some other growers, who depend on money-lenders. The write-offs are a disincentive to the banking system because people have expectations of future waivers as well.

The borrowers see value in strategic defaults.

While it is important for banks to make credit available to farmers so that they can leverage and do better, it is also important to maintain credit discipline.

Loan waiver schemes vitiate the credit culture and make it tougher for banks to continue lending to these segments. They create moral hazards in the financial system by rewarding those farmers who default on their loans, offering nothing to those who pay. They do not take into account the loans growers have taken from the informal sector.

There is also no distinction between voluntary and involuntary defaults, so it actually rewards those that have willfully defaulted.

Additionally, the scheme does not take into account climatic conditions and fertility of the soil. Farmers in certain areas face a higher risk of crop loss on account of weather conditions.

Frequent debt waivers may prod banks to invest in alternatives to farm lending such as the Rural Infrastructure Development Fund instead of reaching out to individual farmers to meet their agriculture lending targets, giving a field day to the local moneylender.

Bankers rue that a large chunk of farm loans go only in buying seeds or fertilisers, rather than being invested in mechanisation. India is the world's second-biggest producer of rice, wheat, cotton and sugar, but its productivity is way below the world average.

Bankers bemoan the rise in "wilful" defaults among those taking agricultural loans – and using them to marry off their daughters, becoming lenders themselves, building extensions for their farmhouses, or lavishing these loans on social occasions.

We need to understand challenges specific to small farmers and figure out farming models that can combine the best of affordable hassle-free institutional credit, -tech-driven , sustainable and environmentally sound agricultural practices, bridging the gap between financial institutions, scientific know-how and farmers' do-how.

It is important to harness all the tools that indigenous wisdom, modern finance and contemporary science can offer. Only sincere cooperation between the three can ensure an agricultural revolution suited to our times.

(Moin Qazi is a development professional. He worked for over three decades with the State Bank of India as a grassroots field officer, program manager, policymaker, and researcher in development finance. The views are personal.)