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Farmer Debt: A comprehensive analysis

1st October 2015.George Kottakal.0 Likes.0 Comments


Ill fares the land to hastening ill a prey

Where wealth accumulates and men decay

Princes & Lords may flourish or may fade

But the bold peasentry, their country’s pride

When once destroyed can never be supplied

-lines from Oliver Goldsmith’s ‘Deserted Village’ recited by Dr. Manmohan Singh in a debate on the motion of thanks to the President in March 2008.

It was about Punjab that Malcolm Darling,a distinguished British civil servant in the undivided Punjab of British India, had said in 1925, on the eve of the period of great distress in Indian agriculture “The Indian peasant is born in debt,lives in debt & dies in debt.”

As agricultural prices are linked to world prices there is always the risk of price volatility.In times of high prices,farmers are encouraged by experts to devote all their resources to high priced agricultural goods at the expense of diversification. Other farmers may join the bandwagon without fully understanding the volatility of world markets.A sudden fall in agricultural prices can have a devastating impact on its supply chain with the farmer being most vulnerable to price fluctuations.Unable to cope with mounting debt &  lack of safety net provided by the government can drive the farmer to complete despair.

Non payment of arrears by sugar mills/factories is a major cause for farmer debt.On their part,factories state that Fair & Remunerative Price(FRP) fixed by the Centre is unfair & does not factor the dynamic national and international price of sugar that works on the economy of demand and supply.Nexus between politicians and sugar mill owners has made it hard for any recovery of dues by the farmer. Even late payment of arrers may be termed too little too late as it is never the full amount and the farmer may already be neck deep in the vicious cycle of debt by then.

The crusade against inflation has resulted in a savage attack against he Minimum Support Price(MSP). The suggestion of the commission on Agricultural cost & prices that MSP is a legally guaranteed right is laughable as the collapse of several commodities has forced farmers to often sell below the MSP. The rise of MSP over the years is marginal a best. The attack on MSP itself is unjustified as there are more sinister causes behind the inflation story. The Agricultural Produce Market Committee (APMC) Act notifies agricultural commodities produced in the region such as cereal,pulses,fruits,vegetables & even chicken,fish,goat, etc. & provides that first sale in these commodities can be conducted only under the aegis of APMC through commissioned agents licensed by the APMC set up under the act. Levies & other market charges imposed by the states are a major source of market distortion. Such high levels of taxes at the 1st level of trading have significant cascading effects on the prices as the commodity passes through the supply chain.In addition,multiple middle men in the supply chain,lack of storage facilities for perishable goods, diversion of food grains for public distribution system all cause market distortions and increase inflation

Agriculture is a risky venture in India as apart from dangers of crop destruction due to natural calamities such as hail,pest,diseases,drought etc there is a  lack of support mechanism such as proper irrigation,fertilizers,knowledge in optimum farming techniques which increase the risk of crop failure.Lack of risk cover by the government in the form of insurance against crop failure has further caused the likelihood of farmer debt.

In low rainfall areas traditional crops such as jowar,gram sunflower,moong & urad are abandoned for more profitable cash crops such as sugarcane which is a huge water  guzzling crop.Farmers with small & marginal land holdings also have a tendency to sell their crops earlier than their maturation date due to lack of infrastructure in order to make ends meet and are thus unable to reap the full dividends.Many lease agreements & rent for tenants is done through word of mouth and no official documents exist.Due to the these agreements being informal,banks are always hesitant to lend which causes the farmer to be driven into the arms of predatory lenders.

Due to absence of institutional credit,private & informal credit takes several forms, such as the classical usurious moneylender.Here the farmer is squeezed off every penny and is led to financial ruin. The deceptively low rates of interest in micro finance is what has endeared it to those who advocate it as a response to failure of institutional credit to reach small farmers and businesses, It rests on simply taking the interest at face value,without factoring the repayment that borrowers make,typically on a weekly basis.Simple interest charged by the Micro finance Institutes through Self Help Groups(SHG) ranges between 18%-24% & in some cases as high as 36%.Since SHG’s are close knit,often within the same village a member with outstanding loans faces pressures that cannot be ignored. The only way to attack usurious lending practices is to get the institutional credit back on track.

Farmer indebtedness is the root cause of farmer woes It is highly unlikely that the average Indian farmer can take on all these challenges by himself/herself. With proper policy implementation such as insurance cover,better supply chain management,expansion of agricultural credit to name a few ,the problem can be tackled provided sustained effort is put into it



1.The Accidental Prime Minister :Sanjaya Baru

2.Frontline Magazine

3.Economic Survey of India 2015

4.Shanta Kumar Committee report


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