July 1, 2006EconomyPublic Policy

Vidarbha whodunit

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

This is an archived blog post from The Acorn.

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.

This post also appears on The Indian Economy Blog

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

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