The Hindu Business Line : Farmer suicides: Beyond the obvious

Extension of highly regulated institutional banking services is not the sole means of realising economic efficiency and distributive justice as far as dealings in credit markets are concerned.

Almost all farmer-suicide cases in India are debt-related. While the government is reportedly ready with a package that will provide low-cost credit, alternative sources of income, including from dairy and poultry, improved irrigation and probably crop insurance, These may be helpful but perhaps not sufficient.

It may not be factually incorrect to say that farmer suicide is a global phenomenon. But while these are largely engendered by psychological and sociological factors in the developed world, in India and other developing countries, the causes are primarily economic.

Almost all farmer-suicides in India are debt-related. The farmer-debtor is generally required to repay his/her debt right after the harvest is in. This means that the farmer is trapped in a regressive market mechanism in two ways.

First, with no other means to repay the debt, he/she is forced to sell the produce immediately after the harvest — quite often to the creditor or to the creditor's agent, probably at a pre-arranged price or in pre-decided quantities.

Second, sale of crops immediately after the harvest means that the farmer-debtor probably receives less for his/her produce than what he/she could have obtained at a later point in time when the market prices stabilise.

Credit and marketing

The evidence also suggests that, in general, there are strong links between credit and marketing. Farmers, on an average, borrow much larger amounts from commission agents or traders than workers do from employers or tenants from landlords, or even those who have no other dealings with their creditors.

Moreover, links between credit and output are the strongest in the more commercialised areas. On reflection, this is hardly surprising since traders and commission agents will seek out business — and seal it with finance — where there is a substantial marketable surplus.

An important related question is the extent to which farmers participate in the formal and informal segments of the credit market. The rationality of the farmers' decision to approach the informal lender for credit despite the high interest rate has been a matter of theoretical debate.

Interestingly, most of the informal lenders operate in a limited area or in a niche market where personal knowledge of borrowers makes transactions possible.

This enables informal lenders to reduce transaction costs (for example, those relating to loan appraisal, documentation and legal fees) to a minimum. Such loans are characterised by quicker processing time and disbursal, more effective screening techniques and enforcement devices and also by higher interest rates.

Cash crop farmers

While all that has been stated above is true of farmers in general, the case of cash crop farmers deserves special attention. Interestingly, farmers who go for cash crops such as tobacco, sugarcane, or cotton are not the typical small farmers.

They are the ones with relatively large land holdings and risk appetite and for them farming is an act of commerce. The anticipated incentives in the output market are the motivating factors for hard work as well as for high input costs. The results are, however, not always as expected.

During harvest time, supply of crops often overshadows demand and thus price goes down. This is due to the pressure created by both formal and informal lenders for loan repayment immediately after harvest.

As a consequence, not only are marginal input costs higher than the marginal revenue, even average input costs are sometimes higher or just marginally lower than the average revenue, leaving little or no cash surplus for loan servicing.

Important trends

This must force our attention to two important trends: The rising real costs of agricultural inputs and the simultaneous relative falling of real prices of agricultural commodities.

There is no denying that agricultural price in relation to manufacturing price has been declining locally as well as globally.

What is the single most important factor for this? The US and the EU agricultural subsidies are the culprits. These have suppressed the agricultural price globally.

On the other hand, the developing countries are required to eliminate all agricultural subsidies and open their markets to imports under the World Trade Organisation regime: The government has already withdrawn from the market to buy cotton. So you have the suggestion, "buy low-cost foreign cotton with high subsidy content at the cost of the Indian farmers' poverty."

For Indian cotton farmers there could be other major but invisible factors as well. Global firms are now selling GM (genetically modified) cottonseeds in India.

These seeds are expected to be pest-resistant and high-yielding. But the Indian farmers have little experience in using these seeds under different agro-climatic conditions. The GM seeds are also not covered by the Seeds Act and the government is unable to take any action when the seeds do not deliver the promised benefits.

These seeds cannot be saved by the farmers and have to be purchased from the producers on a recurring basis who also charge a high "technology fee.".

In turn, the high cost seeds need other high cost inputs and together, they turn cotton farming to a high-risk/high-return game, which is not suited to Indian farmers with shallow pockets.

Solutions

The government has woken up to the distress of these farmers and is reportedly ready with a package for the worst affected districts in four States.

It will provide cheap credit, alternative sources of income including from dairy and poultry, improved irrigation and probably crop insurance. These may be helpful but perhaps not sufficient.

Take credit: If private credit is dear and scarce, the first step is to establish why it is so; only then is devising a sensible prescription possible. Otherwise, this will create confusion and corruption. There are several ways by which the government can reduce the lender's cost of business.

For example, public investments in rural infrastructure and policies which promote agricultural yields may reduce the lender's cost. Thus, it is quite possible that well-functioning rural credit markets are a consequence rather than cause of general development.

In any event, it should now be clear that the extension of highly regulated institutional banking services, so vigorously pursued by the government, is not the sole means of realising economic efficiency and distributive justice as far as dealings in credit markets are concerned.

Crop insurance is one solution, according to certain quarters. This is particularly true for uncertainties such as agro-climatic factors and natural calamities.

It is still not clear how the farmers will deal with the uncertain price during the time of harvest.

A systematic investigation of the many relevant policy and operational issues is necessary to provide factual and analytical support for an optimal policy and regulatory environment.

Such an investigation may also show how informal credit markets, with all their strengths and weaknesses, can be used in the development process.

And finally, more basic and systemic issues leading to declining terms of trade for agriculture will also need investigation and redress.

(The authors are professors at the International Management Institute, New Delhi.)