09-28-2006, 07:06 AM
<!--emo&:ind--><img src='style_emoticons/<#EMO_DIR#>/india.gif' border='0' style='vertical-align:middle' alt='india.gif' /><!--endemo--> Suicide notes from the country
Laveesh BhandariPosted online: Thursday, September 28, 2006 at 0000 hrs Print Email
Laveesh Bhandari
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Farmer's suicides, a charged political issue, received a lot of attention again at the recently concluded Congress conclave. But standard political solutions are typically not informed by basic economic logic. The reasons farmers are committing suicide are actually not varied; a same or similar set of factors are involved in tragedies around the country.
The first has to do with the riskiness of farming. Environmental, biological and economic risks are quite high. This is especially so for farmers who are forward-looking and are more ready to invest in productivity increasing and expensive inputs such as seeds, fertilisers and pesticides. The availability of secured credit now enables even the small farmer to benefit from these productivity and income increasing inputs. In traditional modes of agriculture one could obtain seeds, manure and other inputs at low, or even zero, costs. And therefore, though returns were low, the risk was also low. But with the newer and costlier technologies that is not the case. This is true of a wide range of agri-commodities, whether it is cotton and its high requirement for pesticides, or foodgrains and great dependence on fertilisers, and so on.
It is sometimes thought that only the small, underprivileged farmer suffers from this problem. To the contrary, the farmer who invests in greater productivity inputs could be small or large; in fact most of the suicides are reportedly from farmers who are quite literate. A Tata Institute of Social Sciences study in Maharashtra found that of the 644 cases studied more than four-fifths were literate. This is not surprising, as the farmer who purchases the costlier high-productivity inputs tends to be the more forward-looking one. In other words, the farmers who are most affected negatively are precisely the ânewâ farmers that agriculture policy has been trying to create and support.
The second has to do with the lack of a fall-back in case either the crop or prices fail the farmer. When credit is not availed at the start of the agri-season, the need for fall-back has only to do with the familyâs consumption requirements till the next season. However, when credit is availed, then the fall-back becomes important. Again we find that a typical suicide is preceded by three stages. First, inability to pay back the primary lender after a crop failure. Second, recourse to the secondary lender, and sometimes even a recourse to a third lender. The hierarchy varies and depends on the individual conditions of each farmer. But family and banks are at the top and private money-lenders with their much higher interest rates tend to be the last recourse.
At the third and final stage, if the farmer misses out on adequate returns, he would lose his farm and perhaps all his other assets as well. Some accept this fate, and others prefer to withdraw from life altogether. It is therefore possible to identify the farmers who are moving towards insolvency, and it is possible, at least in theory, to take corrective action before the unfortunate event finally occurs.
First, after the first default, farmers will typically take another loan to either meet the repayment requirements of the first creditor or to further invest for the next season. These are the most vulnerable set. And it is at this point that some security mechanism needs to kick in.
Second, many identify the private moneylender and his usurious interest rates as a contributory factor. Indeed, high interest rates are but natural for highly risky credit. The problem is not as much cost of funds as the tenure and repayment terms. If credit were available for a longer tenure one could shift re-payment from one season to another â in many if not most cases (and that includes the organised financial sector creditors as well) that is not possible.
Third, if default does occur, farmers rarely take recourse to declaring insolvency. This is for many reasons. Insolvency procedures in India are quite out of tune with a liberalising, entrepreneurship oriented economy. The law requires the defaulter to not indulge in similar activity while the insolvency motion is under consideration. It also demands properly kept accounts to show that the funds were only used for the purpose declared and not for any other. Moreover, the burden of proof is on the defaulter. Last, bank managers typically respond to default by small businesses and farmers by reporting it as a case of criminal default or breach of trust. And if a criminal case is instituted, then insolvency cannot be declared.
Overall, therefore, the cards are well stacked against the farmer in case things go wrong. And given the riskiness of his business this is likely to happen in a large number of cases. The solutions require more than a visit to highly affected areas. Special information requirements exist for educating the distressed farmer on possible courses of action in case things worsen in the future. Agriculture is a different business and requires carefully designed repayment terms and built-in renegotiation clauses. Last, it is time that Indiaâs insolvency laws recognised that default signifies the failure of the farm, and not of the farmer.
The writer, an economist, heads Indicus Analytics
laveesh@indicus.net
Laveesh BhandariPosted online: Thursday, September 28, 2006 at 0000 hrs Print Email
Laveesh Bhandari
Related Stories Inflation is here to stay
Farmer's suicides, a charged political issue, received a lot of attention again at the recently concluded Congress conclave. But standard political solutions are typically not informed by basic economic logic. The reasons farmers are committing suicide are actually not varied; a same or similar set of factors are involved in tragedies around the country.
The first has to do with the riskiness of farming. Environmental, biological and economic risks are quite high. This is especially so for farmers who are forward-looking and are more ready to invest in productivity increasing and expensive inputs such as seeds, fertilisers and pesticides. The availability of secured credit now enables even the small farmer to benefit from these productivity and income increasing inputs. In traditional modes of agriculture one could obtain seeds, manure and other inputs at low, or even zero, costs. And therefore, though returns were low, the risk was also low. But with the newer and costlier technologies that is not the case. This is true of a wide range of agri-commodities, whether it is cotton and its high requirement for pesticides, or foodgrains and great dependence on fertilisers, and so on.
It is sometimes thought that only the small, underprivileged farmer suffers from this problem. To the contrary, the farmer who invests in greater productivity inputs could be small or large; in fact most of the suicides are reportedly from farmers who are quite literate. A Tata Institute of Social Sciences study in Maharashtra found that of the 644 cases studied more than four-fifths were literate. This is not surprising, as the farmer who purchases the costlier high-productivity inputs tends to be the more forward-looking one. In other words, the farmers who are most affected negatively are precisely the ânewâ farmers that agriculture policy has been trying to create and support.
The second has to do with the lack of a fall-back in case either the crop or prices fail the farmer. When credit is not availed at the start of the agri-season, the need for fall-back has only to do with the familyâs consumption requirements till the next season. However, when credit is availed, then the fall-back becomes important. Again we find that a typical suicide is preceded by three stages. First, inability to pay back the primary lender after a crop failure. Second, recourse to the secondary lender, and sometimes even a recourse to a third lender. The hierarchy varies and depends on the individual conditions of each farmer. But family and banks are at the top and private money-lenders with their much higher interest rates tend to be the last recourse.
At the third and final stage, if the farmer misses out on adequate returns, he would lose his farm and perhaps all his other assets as well. Some accept this fate, and others prefer to withdraw from life altogether. It is therefore possible to identify the farmers who are moving towards insolvency, and it is possible, at least in theory, to take corrective action before the unfortunate event finally occurs.
First, after the first default, farmers will typically take another loan to either meet the repayment requirements of the first creditor or to further invest for the next season. These are the most vulnerable set. And it is at this point that some security mechanism needs to kick in.
Second, many identify the private moneylender and his usurious interest rates as a contributory factor. Indeed, high interest rates are but natural for highly risky credit. The problem is not as much cost of funds as the tenure and repayment terms. If credit were available for a longer tenure one could shift re-payment from one season to another â in many if not most cases (and that includes the organised financial sector creditors as well) that is not possible.
Third, if default does occur, farmers rarely take recourse to declaring insolvency. This is for many reasons. Insolvency procedures in India are quite out of tune with a liberalising, entrepreneurship oriented economy. The law requires the defaulter to not indulge in similar activity while the insolvency motion is under consideration. It also demands properly kept accounts to show that the funds were only used for the purpose declared and not for any other. Moreover, the burden of proof is on the defaulter. Last, bank managers typically respond to default by small businesses and farmers by reporting it as a case of criminal default or breach of trust. And if a criminal case is instituted, then insolvency cannot be declared.
Overall, therefore, the cards are well stacked against the farmer in case things go wrong. And given the riskiness of his business this is likely to happen in a large number of cases. The solutions require more than a visit to highly affected areas. Special information requirements exist for educating the distressed farmer on possible courses of action in case things worsen in the future. Agriculture is a different business and requires carefully designed repayment terms and built-in renegotiation clauses. Last, it is time that Indiaâs insolvency laws recognised that default signifies the failure of the farm, and not of the farmer.
The writer, an economist, heads Indicus Analytics
laveesh@indicus.net