MacroScan - The Burden of Farmers' Debt

The agrarian crisis that has rampaged through rural India for the past few years has been associated very clearly with a rising burden of indebtedness among farmers. The inability to repay past debt - and therefore to access fresh loans - has been widely accepted as the most significant proximate cause of the farmers' suicides that were so widespread in Andhra Pradesh and Karnataka, and are apparently continuing in areas as far apart as Wayanad in Kerala, Vidarbha in Maharashtra and some areas of Punjab and Rajasthan.

Despite this, apart from reports from the field by some persistent journalists and other observers, there has been nothing in the shape of aggregate data that would provide some estimate of the actual extent of rural indebtedness. These reports have suggested that the decline in access to institutional credit has driven more farmers back to potentially more exploitative usurious relations with traditional moneylenders or input dealers. Repayment problems, resulting from the greater difficulties of cultivation because of rising input prices and volatile output prices, have been compounded by the higher interest rates charged by these informal sources.

Until recently, however, there has been no way of verifying these perceptions on the basis of a large dataset based on information garnered from across the country. Therefore, the recent report of the National Sample Survey, based on the 59th Round Survey conducted in 2003, is particularly important, since it provides the first systematic evidence since 1992, on the causes, extent and sources of farmers' debt.

This is part of a series of reports based on the Situation Assessment of Farmers, which covered the educational level of farmer households; level of living as measured by consumer expenditure, income, productive assets and indebtedness; their farming practices and preferences; resource availability; awareness and access to technological developments etc. The survey was conducted only in the rural sector of the country over January to December 2003. In all 51,770 households spread over 6,638 villages were surveyed in the Central sample. The survey did not cover landless workers.

As expected, the extent of farmers' indebtedness emerges as very substantial. As Chart 1 indicates, nearly half (48.6 per cent) of farmers households were reported to be indebted. This is clearly a very substantial extent of recorded debt, and also represents a substantial increase over time. A similar survey by the NSS relating to 1991 found indebtedness among only 26 per cent of farmers.

The incidence of indebtedness was the highest in Andhra Pradesh, where more than four-fifths of surveyed farmers were in debt, followed by Tamil Nadu with nearly three-fourths of farm households reporting indebtedness. In Punjab, Kerala and Karnataka the proportion was nearly two-thirds, and in Maharashtra, Haryana, Rajasthan, Gujarat, Madhya Pradesh and West Bengal more than half of the farmers surveyed were in debt. It is worth noting that some of the states where the agrarian distress is reported to be especially severe, such as Andhra Pradesh, Karnataka, Maharashtra, Punjab and Rajasthan, are also those which report high levels of indebtedness.
Chart 1 >>

The proportion of indebted households appeared to be around the same, which is between 48 and 52 per cent of households, across cultivating households as well as those who received income from related activities such as animal husbandry, poultry and fishery, and management of orchard crops.

It is significant that the dominant cause for taking loans was found to be for productive purposes. Chart 2 provides this information, and shows that the two most important purposes of taking loans were stated to be ''capital expenditure in farm business'' and ''current expenditure in farm business'. At the all-India level, out of every 1000 rupees taken as loan, 584 rupees had been borrowed for these two purposes taken together.
Chart 2 >>

The highest such proportion was in Maharashtra, where 75.4 per cent of loans were taken for the purposes of productive investment on farms, whether in the form of capital or current expenditure, followed by Karnataka with 68.2 per cent. In Punjab, Andhra Pradesh and Uttar Pradesh the proportion exceeded 60 per cent of the total amount of loans. As such, this shift towards more emphasis on more productive loans would appear to be desirable, but the problem in the recent past has been that even such loans have been difficult to repay because of changes in production conditions, leading to a vicious cycle of indebtedness. So cultivation itself has become less economically viable over time.

The next important purpose of taking loans was for spending on ''marriages and ceremonies'', which however accounted for a much smaller proportion of total loans, at around 11 per cent. This purpose was most important for farmer households of Bihar (22.9 per cent) followed by those in Rajasthan (17.6 per cent). This is relatively small and certainly runs counter to any perception that such unproductive expenditure is the dominant cause of farmers' indebtedness.

A more worrying aspect that emerges is the significance of pure consumption loans - these accounted for 8.8 per cent of all amounts borrowed by farmers at the all-India level, and as much as 13.8 per cent in Rajasthan. The persistence of such consumption loans is a sad comment indeed on the viability of cultivation, and on the lack of progress in improving basic survival conditions of agriculturalist families.
Chart 3 >>

A question of great interest relates to the source of loans. The basic purpose of bank nationalisation and the focus on agricultural credit co-operatives was to extend the reach of institutional credit, so as to weaken the stranglehold of traditional moneylenders and thereby ease the credit conditions facing ordinary peasants. However, financial liberalisation policies from 1992 have led to the progressive weakening of ''priority'' lending to agriculture and a substantial decline in the extension of institutional credit to cultivators per capita or in terms of production costs.

The consequence of this is evident in Chart 3, from which it is clear that moneylenders have emerged as the most significant source of credit for farmers, with 29 per cent accessing this source. The influence of moneylenders appears to be especially strong in Bihar (44 per cent) and Rajasthan (40 per cent). Traders - of both inputs and outputs - also have provided loans to 12 per cent of indebted farmers. However, institutional sources still remain significant, with more than half of farmers accessing government, co-operative societies and banks taken together.

The other striking feature that emerges from the survey is how widespread indebtedness is across size classes of farmers. Table 1 indicates, as expected, that the average amount of the outstanding loan increases with the size of the land holding, but what is more interesting is that the proportion of indebted farmers also increases with the size class. Further, even among very small and marginal farmers, the amount of outstanding loan is substantial, given the likely low incomes from such small holdings, which suggests some sort of cumulative process leading to a debt trap for the very resource poor cultivators.
Table 1 >>

Clearly, the rural debt situation, especially for cultivators, is grim, and requires urgent policy attention. A beginning has been made by the UPA government in terms of increasing the provision of institutional credit to farmers, but as this brief discussion has shown, that is only a part of the problem. To rescue farmers from debt traps that have come about because they have taken production loans, it is necessary to confront the problems currently afflicting the viability of cultivation.

The problem of agricultural indebtedness is intimately linked with issues of undesirable input use, constantly increasing input costs, volatile crop prices and difficulties in accessing markets. Therefore, it is to these aspects of production conditions in agriculture that policy intervention must now be directed.