The Indian Economy Blog

July 1, 2006

Vidarbha Whodunit

Farmers are killing themselves because the government has denied them economic freedom

Scores of farmers in Maharashtra’s Vidarbha region have been driven to suicide over the last few years, mostly on account of their inability to pay their creditors. Commentators have been quick to blame everything from bad monsoons, to multinational corporations (selling genetically modified cotton, for good measure), to President Bush’s subsidies to American cotton farmers, to WTO-driven lowering of import tariffs and even to the surge in the export of raw cotton as a result of the end of quota regime in the international textile trade. Directing the needle of suspicion on these peripheral actors has generally diverted attention from the real culprit — the government. By their sins of omission and commission, the central and the Maharashtra state governments have caused those scores of farmers to take their own lives.

Consider. Firstly, farmers can only sell their produce through a state-controlled monopoly, which sets the purchase price through bureaucratic fiat. Often, this is near or below the cost of production. Farmers also have to bear the cost and the risk of transporting their harvest to purchasing centres. Secondly, public investment in irrigation infrastructure is abysmal, with the bulk of the state expenditure on agriculture going into subsidies for cereal crops, which, perhaps consequently are produced in surplus. Vidarbha’s cotton farmers thus rely on Mother Nature, and especially on the monsoon. They have no means to manage this risk. Thirdly, the dominance of the state in the financial sector and its inability to create an adequate banking and financial market infrastructure in rural areas has driven up interest rates and hamstrung sources of credit. Clamping down on private moneylenders—designed to prevent exploitation—has both driven the business underground and choked the supply of credit. Combined with vitiating factors like corruption, red-tape and legal delays, the cumulative effect of these government policies over the years has been to cause farmers to kill themselves—usually by ingesting pesticides.

Vidarbha calls for both fundamental reforms as well as emergency relief measures that maximise the economic freedom of the farmers, traders, banks and others businesses in the value chain.

“The government hates competition”
The government stranglehold on cotton procurement should be the first to go and make way for a free market in agricultural commodities. Instead of being the sole buyer, the government can play an important role as buyer of last resort. It should set its ‘support price’ a rung below the market price to serve as a safety net during the transition to the market. In the market-based system, the role of the government will then be to exercise regulatory oversight and ensure fair play. Agricultural markets have evolved in other countries with a range of features like crop insurance, price protection and futures markets that help ordinary farmers manage their risks.

No water is free (punctuate this properly)
Political stunts (and economic lunacies) like free power often serve as a mask for the government’s chronic failure to invest in irrigation infrastructure. So much is irrigation treated with fatalism that it is considered acceptable for GDP growth figures to be cited ‘subject to monsoon’. Those who suggest that farmers will be unwilling to pay for guaranteed supply of electricity and water need only to look at some of the things Vidarbha’s farmers borrowing money for. For if they borrow thousands of rupees for digging a bore-well, they should be more than willing to pay a few tens of rupees each month for their water supply. Public-private partnerships can close the gap between the supply and demand for irrigation if the government is willing to help take the politically difficult step of telling the farmers that the free lunch is not only not free, but that it is killing them too.

From risky transfers to transferring risks
A majority of Vidarbha’s farmers borrow money from either co-operative banks or private moneylenders. These institutions are unable to properly manage the risk of borrower’s defaulting — leading the former to deny further loans to farmers with poor credit histories and the latter to charge extremely high rates of interests. Further, the use of land as collateral is considered ‘risky because suicides can lead to cancellation of such contracts’. Financial institutions in analogous situations—like American banks in the student loan business—can manage risk by selling the loan portfolio to other investors. Rural co-operatives and moneylenders in Vidarbha can’t. Though challenging, the government must provide incentives for financial insitutions and other investors to pick up the risks from rural creditors.

And it is in this area that emergency relief measures will be most effective. The temptation to provide relief to the farmers through promises of cheaper loans is likely to be powerful. More effective though is the purchase of agricultural debt (of small and medium farmers) from the rural co-operatives and moneylenders. This will free them to do what they know best — lend money to farmers. Laws prohibiting moneylending and private loans are not only bad in principle but also end up making loans expensive. Moneylenders may not be politically popular due to social contexts, but the reason they charge high interest rates is simply because they can. They can’t if rural banks don’t turn away borrowers. Government intervention should therefore be targeted at allowing rural banks to lend, by underwriting or absorbing their existing outstanding loans.

Is this crisis an opportunity?
After visiting some villages in the region, Prime Minister Manmohan Singh has announced emergency measures that look suspiciously like ‘same old’. It is difficult to understand why he thinks restructuring loans and interest waivers will work now, when the farmers themselves have told him that the loans under the previous package announced by the state government have yet to be disbursed.

He has another chance if he does not settle for mere political palliatives. Moments of crisis are moments of opportunity for Indian reformers, so a theory goes. Whether or not there is any truth to this theory, Dr Singh would do well to tackle the problem at its roots. After all, it is the Indian government that is responsible for the suicides.

Related Links: Ila Patnaik’s call for reform (via Ajay Shah) and earlier posts by Gaurav Sabnis, Sandeep, Ashish Hanwadikar and Sonia Faliero

5 Comments »

  1. I’m glad to see the Indian Government get it’s share of the blame, but why do you stop short of a proposal starting an Indian Fannie Mae or Freddie Mac?

    It’s clear from the last paragraph that the state is incompetent at handing out loans, perhaps it would be better at simply holding on to some debt, and privatizing everything else, including the management of an Indian Fannie Mae.

    Comment by Devang — July 2, 2006 @ 7:27 am

  2. You mean an Indian “Falguni Maa”? :-)

    Comment by Nitin — July 2, 2006 @ 7:43 am

  3. ha.. whatever it may be called, and although eventually it’s management may become corrupt like here, and the then-conservatives in India may cast it as proof of a failed government entity, the debt liquidity provided by it is key in my view.

    With all this talk of public-private partnership, a financial lender should be on the top of that list. Albeit with a bit more transparency than here, which may stop it from becoming corrupt.

    Comment by Devang — July 2, 2006 @ 8:21 am

  4. Devang,

    The asset management company that the Indian government set-up to take over non-performing assets from nationalised banks has done a reasonable job. It would be interesting to see if there are private investors ready to manage the rural debt underwriting, if it is funded by government.

    Comment by Nitin — July 2, 2006 @ 10:50 am

  5. “Thirdly, the dominance of the state in the financial sector and its inability to create an adequate banking and financial market infrastructure in rural areas has driven up interest rates and hamstrung sources of credit.”

    Nitin, I don’t disagree at all with the central thrust of your argument, but don’t lets forget here one interesting group of ‘periferal actors’, the central bankers, and especially the Bank of International Settlements in Basle. Their obession with excess global liquidity (which I think is a non-problem, in the sense that it is the developing world which is now the ‘engine’ of growth – you can deduce this quite simply by looking at the current global average growth rate of 5%, and then remembering that growth in Europe is around 2%, Japan 2.5%, and the US around 3%, so someone else is doing the ‘heavy growth lifting’ at the moment, and that someone else needs liquidity, as we have just seen in Turkey).

    The current rate-raising cycle (which is laregly un-necessay, if there hadn’t been a cock-up in the Greenspan-Bernanke handover, the US could have ‘topped out’ at 5%, and Europe and Japan, frankly and as we are about to see, don’t need rate rises) is prioritising first world obsessions over developing world needs.

    Rates in India are rising, and it isn’t *all* the government’s fault. So I think yes, some of those suited gentlemen who gather together in places like Basle from time to time should think about Maharashtra’s farmers, and some of the burden of responsibility that they also carry.

    Comment by Edward — July 2, 2006 @ 12:31 pm

  6. Edward,

    I won’t disagree with you when you point out that the Fed & ECB rarely care about Indian farmers when they proceed with their agenda.

    But it is not uncommon to find that state-owned banks offer loans at very low rates of interest, but only in theory, for the process of disbursement is driven by political considerations rather than commercial ones. Many ordinary farmers can’t get in. Moneylenders and traders fill in the breach, and offer loans at rates of interest that are outrageous because they have little competition. Those well-heeled central bankers may be responsible, but the extent of their influence fades in comparison to the influence of the Indian government.

    I would judge centrality/peripherality by incremental change caused. A small change in direction by the Indian government can improve/damage the ground situation quite drastically — for example, the clampdown on private moneylending and the discontinuation of the Rs500/quintal advance made things much worse last year.

    Comment by Nitin — July 2, 2006 @ 4:02 pm

  7. “Those well-heeled central bankers may be responsible, but the extent of their influence fades in comparison to the influence of the Indian government.”

    I don’t disagree, and you obviously know more about this than I do, and again this is something which *can* be addressed inside India, while the other factors can’t. I just think the ‘periferal actors’ shouldn’t be let of the hook completely, that’s all. Efficient capital and credit markets (rather than systems which protect insiders) would obviously be a big step forward for India.

    Comment by Edward — July 2, 2006 @ 5:31 pm

  8. [...] ter all, it is the Indian government that is responsible for the suicides. This post also appears on The Indian Economy Blog Related Links: Ila Patnaik’s call for reform (via [...]

    Pingback by The Acorn » Vidarbha whodunit — July 2, 2006 @ 5:55 pm

  9. “It is difficult to understand why he thinks restructuring loans and interest waivers will work now, when the farmers themselves have told him that the loans under the previous package announced by the state government have yet to be disbursed.”

    Nitin, isn’t that the key. Recycling of tried and failed solutions is a long-term fad in India. Don’t expect any change in policy change until UPA is in control – dropping price control isn’t going to happen, no matter how many farmers kill themselves (NDA is no better; when it comes to farmer policy, sound policy goes out of the window).

    Fact is, price control works well for other farmers – FCI procures and hordes excess grain until it perishes and grain farmers get to produce more than need by the market place – the cycle continues. What I don’t understand is why do cotton farmers continue with cotton if it is not working out time and again?

    Edward, inflation is big no-no in India. The grey suits in RBI would do anything to keep a tab on it irrespective of Basel. The cotton farmers’ issue, I think, is related to market mechanism (or, rather, the lack of it) for farm products rather than interest rate policy.

    Comment by Chandra — July 4, 2006 @ 12:15 am

  10. To be fair, Edward, Chandra, there are those on the left here in the US, like Clinton’s former secretary of labor who say this:

    “In the end, the people who get clobbered when the Fed raises rates and the economy slows are those at the end of the job line — people who need jobs, or are in low-paying ones. They’re the first to be let go. At a time when the number of working poor in America are already ballooning, and the ranks of the impoverished are growing, it’s not only economically wrong for the Fed to go on raising rates. It’s ethically wrong.”

    I don’t imagine things being different in India. Targeting Inflation isn’t an exact science, and if India is to continue to have a healthy farming sector with perhaps a 2nd green revolution, concerns like these must be weighed against inflation increases. I like Milton Friedman’s commentary on abolishing the reserve banks, inflation would be better checked then.

    Comment by Devang — July 4, 2006 @ 12:48 am

  11. Farmers are committing suicide because they are foolish to exchange their produce which has “inherent value” against currency notes which do not have any inherent value and is printed by RBI(Reserve bank of India) which does not have anything of inherent value as reserves!!! If you go to RBI and give them Rs.20 note and ask for 1 kg rice RBI chairman does not have 1 kg rice to give. This is the biggest conundrum in modern paper currency economics!!! By the way i am not talking about gold currency economics either, because like paper gold also does not have any value, you cannot eat it, you cannot use it in any way to produce something of value(value means something that will sustain life)!

    If RBI arbitrarily prints worthless paper currency and if farmers accept it then farmers are foolish. What is happening is simple if a person exchanges something of value against something worthless then he will soon go insolvent that is exactly what is happening to farmers.

    The only way for farmers to do sustainable agriculture is to stop accepting paper currency, they should go back to barter system, exchange agricultural produce against other goods and let the traders handle worthless currency that reserveless RBI prints. Soon instead of farmers traders will start committing suicide!!!!

    This is the pathetic condition of modern reserveless currency economics……..

    Now the solution to stop farmer suicides
    =======================================

    Merge RBI and FCI(Food Corporation of India), we can call this entity RFCI(Reserve Food Corporation of India) this entity should be printing currency, now RFCI has food reserves against the currency they print. If someone goes to RFCI with Rs.20 note they have 1 kg rice to give and this is exactly how reserve banking should be working!

    If bookworm economists want to understand concept of “VALUE”. Value of 1kg rice, 1kg wheat, 1kg vegetable oil, 1kg thuvar dal, 1kg masoor dal, 1 kg mustard seeds does not change, today, tomorrow, next month, next year, after 100 years.

    Now some bookworm economist want to ask shouldn’t currency act as store of value, answer is anything of real value(value means something that will sustain life) cannot be stored indefinitely, hence currency also need to be of limited validity(say 6 months) and they should be redeemed against the food reserves of RFCI before the validity period expires.

    Conclusion
    ===========

    Today’s paper currency economics is the biggest scam in human history!!!! This scam will end in less than 25 years….. start thinking……….

    Comment by GeneralPublic — July 4, 2006 @ 3:27 am

  12. Robert Reich doesn’t talk about the alternative – what if inflation is 10-15% (in India’s case) and is hard to control. Those same people will be hurt the most (plus a few more).

    It is hard to argue with Friedman’s commentary. I am sure he has vast amounts of data to back him up. But I guess we have to pretend there is someone in control of the knob even if they do more harm then good.

    Comment by Chandra — July 4, 2006 @ 3:28 am

  13. I’ve seen the US Senate hearings with Greenspan where some complain about the savings made by senior citizens being stangnant because of low interest rates, only to hear Greenspan reply with the obvious answer of keeping purchasing power stable. Yes, there are those un-economists here as well. Robert Reich is by no means one of them. All he’s emphasising in his post is that the current newly appointed fed in the current economy may have a tendency to overshoot interest rates, causing deflation. Monetary policy isn’t for everyone, not even for central banks before the period of Greenspan. That’s nothing to say of those who still believe unemployment could be lower if a higher range of inflation was allowed during recessions.

    It has long been an open question whether central banks have the technical ability to maintain stable prices. Their repeated failures to do so suggested that they did not — whence, in part, my preference for rigid rules. Alan Greenspan’s great achievement is to have demonstrated that it is possible to maintain stable prices. He has set a standard. Other central banks around the world, whether independently or by following his example, are following suit. The timeworn excuses for central bank failure to stem inflation will no longer do. They will have to put up or shut up.

    Sorry for diverting from the main topic a bit, the problem is the lack of certain accessible markets within India as you say, rather than Interest rates. With regards to what Nitin said, There’s no point in cracking down on private lending, when the government should really be trying to induce competition in the sector, through some sort of a “mortgage” buyer, like Fannie Mae. If it works with houses here, why can’t it work with farms there?

    Comment by Devang — July 5, 2006 @ 12:49 pm

  14. “…If it works with houses here, why can’t it work with farms there?”

    Short answer, because farmer can’t show a paycheck indicating stable income when signing loan papers. Traditional banking, with or without competition, will not be able to help a farmer with one or two acres with unpredictable income. But the entire system, from government to NGOs, favors small farming as a fashion. Small farming should be a niche, not the norm.

    If there are manufacturing jobs for unskilled to semi-skilled labour in the nearest town, I bet that small cotton farmer will sell the farm at day break and stand in line to fill the job that gives steady paycheck and, probably, better working conditions.

    There is no way out of this situation until small farmers move into different labour markets and farms consolidate for efficiency (and to get that bank loan). Unfortunately, based on current policy paralysis, there is no different labour market to be had.

    Comment by Chandra — July 6, 2006 @ 12:28 am

  15. Nitin, your analysis of how govt control of agriculture hurts farmers is indeed right. However, there is as much govt control of agriculture in Vi0darbha as there is in Western Maharashtra. Yet Western Maharashtra’s farmers seem to be doing well, whereas in Vidarbha it has been raining suicides. How do you explain this?

    Comment by Shivam Vij — July 10, 2006 @ 6:55 pm

  16. HC asks why are farmers still killing themselves Jul. 12th, 2006

    The Nagpur bench of the Bombay High Court on Tuesday asked the Maharashtra Government to explain as to why are farmers still committing suicides despite announcement of special packages. Directing the government to furnish details of the relief package, including its actual implementation and list of persons who benefitted from financial aid announced by the State and the Centre, the High Court recalled its earlier order imposing cost of Rs 1,000 each on 12 top bureaucrats.

    A division bench consisting of Justice R M S Khandeparkar and Justice S R Dongaonkar while hearing a public interest litigation (PIL) filed by Kishor Tiwari, President of Vidarbha Jan Andolan Samiti, made it clear that though the earlier order imposing Rs 1,000 cost on each of the 12 officials for their failure to file reply in time is being recalled ‘it does not mean that we are giving clean chit to the respondent-officials’. The High Court also declined to delete names of the 12 top officials including the Chief Secretary, Principal Secretaries of Home, Agriculture, Marketing and Co-operation, Director General of Police, Commissioner of Agriculture, Divisional Commissioners of Nagpur and Amravati, and Director General of Vasantrao Naik Sheti Swavalamban Mission having its office in Amravati. The order was recalled after the State Government in its exhaustive affidavit tendered unconditional apology and sought waiver of fine, citing several reasons. Giving details of steps taken so far to address the burning issue of rural distress, the Secretary of Relief and Rehabilitation, K B Vatsa in his affidavit pointed out that several short-term and long-term measures have been initiated along with special Rs. 1075 crore package announced by the Chief Minister. In fact lot of measures were taken on the basis of detailed guidelines issued by Bombay High Court which had earlier heard a PIL on farmers suicides, it was pointed out. Apparently not satisfied with the response of the respondent-officials, the High Court asked some probing questions to Associate Advocate General Ashutosh Kumbhakoni about actual implementation of various relief packages and directed him to file detailed affidavit and also display entire information on a special website. After so many packages were announced whether the suicides of farmers have stopped, the High Court asked much to the discomfiture of the government. The High Court also refused to go into claims and counter-claims made by the petitioner who disputed actual figure of Rs 1,075 crore State package and tersely pointed out that these was not an adversarial litigation and everybody should work to provide solace to the distressed farmers who are abruptly ending their life. Seeking concrete suggestions from all the parties, the High Court directed the government to provide detailed information within two weeks about the actual beneficiaries and the actual progress of various relief measures. Adv Firdos Mirza, Adv Vinod Tiwari and Adv Ajay Somani appeared for the petitioner. Associate AG Ashutosh Kumbhakoni and AGP Bharati Dangre represented for the respondent-authorities.
    [back] [print]

    Comment by VIDARBHA JANDOLAN SAMITI — July 13, 2006 @ 10:50 pm

  17. I don’t know much about this situation, but, looking at my own personal experience with buying land in India (albeit in an urban area), I can bet that the situation is excaberated by poor maintenance of land records and the rabid corruption that surrounds any land transactions. Farmers who want to exit the cotton producing business because they cannot produce cotton at a low enough cost cannot sell out their land to more efficient producers.

    These more efficient producers cannot grow enough to truly exploit any economies of scale that might exist.

    The ability to exit is a key to the efficient functioning of a market – however imperfect it might otherwise be. With more transparent land transactions, farmers who couldn’t produce at low enough cost would sell out to other farmers and move to Bombay, Pune or other cities and contribute to the necessary urbanization of India.

    Of course, this is all conjecture on my part…

    Comment by Girish — July 14, 2006 @ 4:52 pm

  18. comment #17: These more efficient producers cannot grow enough to truly exploit any economies of scale that might exist.

    There is no economics of scale it is a myth created by fossil fuel and reserveless paper currency economics! In USA it takes 17 calories of energy to produce 1 calorie of food in large scale mechanized farming, it is not sustainable agriculture!!!! Sustainable agriculture means to use x calories of energy to produce y calories of food where y > x.

    Economy or Economics means – to produce something valuable using lowest utilization of energy. In *real* economics cheapest product will use most energy efficient production process using lowest energy input.

    In “fossil fuel economics” the cheapest product means it uses highest ammount of fossil fuel, it is not “economy”, it is “fossilnomy”.

    Comment by GeneralPublic — July 19, 2006 @ 5:39 am

  19. Rather than provision of new aythority to control the prolem of Vidharbha, government should go in practical ways.As well known fact that only part of subsidy by govt reaches to the farmers. So it is the responsibility of govt to take care of this fact. Govt should take the care of the price farmers fetchon their output. Most of the times traders(intermediate) get more profit than the farmers. I hope that the govt will come out with good sollution on this issue and it is essential.

    Comment by paras gandhi — November 3, 2006 @ 3:54 pm

  20. [...] If he reads a little bit more, he will find who the real culrpit in Vidarbha is. [...]

    Pingback by One Clueless Statement « Maya Kannadi — April 25, 2007 @ 9:17 am

  21. Government should undertake drastic reform in the area of agricultural marketing. The latest move to allow private mandis is a step in right direction. But as like public monopoly Private monopoly also is bad.

    Comment by Rajnath — October 3, 2007 @ 4:50 pm

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