In India’s Boom, Its Farmers Suffer

Wednesday, October 31, 2007


India’s push to lend more money to farmers has coincided with a rise in agricultural output, supporting claims the funds are helping improve the quality of fertilizers and seeds while cushioning farmers from the impact of higher costs.

But farmer suicides, long seen as emblematic of the malaise in Indian agriculture, also continue, illustrating a key drawback: Money isn’t reaching the small farmer most in need of it.

Although credit is just one of several factors that determine the health of the farms, it has grabbed attention in India because small farmers with less than a hectare of land account for nearly 80% of the country’s hundreds of millions of farmers.

Some experts say that if credit distribution improves, the Indian government may find it easier to meet its foodgrain output target, crucial as food prices stay high.

India this month banned exports of some grades of rice for the first time in several decades, amid worries of a possible shortage of the grain. New Delhi is already grappling with a shortage of wheat that has jacked up its import bill.

The booming Indian economy is reliant on industry and services for growth, but farms, which account for just a fifth of gross domestic product, employ nearly two-thirds of the billion-plus population.

The World Bank estimates that about 87% of marginal farmers, who own less than two hectares of land, and 70% of small farmers have no access to credit from a formal financial institution in India. This group has tended to borrow from moneylenders at interest rates as high as 150%, entering a vicious cycle of debt.

In 2004, roiled by reports of farmer suicides and starvation deaths, the government slashed by half the interest rates on farm loans. Since then, commercial banks, at the behest of the government, have more than doubled the amount given as farm loans to 1.9 trillion rupees ($48.3 billion) for the fiscal year ended March 31, from 844 billion rupees three years earlier. This year’s target is 2.25 trillion rupees.

Although foodgrain output grew 3.6% to a record 216.1 million metric tons in the crop year ended in June, it is still below the 220-million-ton target set by the government. The chances are slim that this year’s target of 221.5 million tons will be met; India hasn’t met any annual foodgrain-production target since 1997.

Academics say it is difficult to prove a direct causal link between loans and crop output since many other factors are involved, such as the quantity and spread of monsoon rains and the extent of irrigation. But more credit is going to regions with an extensive irrigation network and where farmers have larger land holdings because the risk of crop failures and defaults is lower, said Y.C. Nanda, a former chairman of National Bank for Agriculture & Rural Development, the umbrella agency that oversees farm credit.

In some of India’s poorest areas, rights groups continue to agitate for waivers of loans to prevent suicides.

According to Vidarbha Jan Andolan Samiti, which represents farmers in the cotton-growing Vidarbha region in the western part of India, 942 farmers have killed themselves in the Vidarbha region so far this year, unable to repay the money they borrowed to buy seeds and fertilizers, whose costs have increased in the past year because of inflation.

Some experts say India’s dependence on commercial banks is an important limitation as such banks often aren’t present in remote locations. India’s commercial banks have a total of 30,776 branches in rural areas. That is roughly one branch for 22,500 people on paper, although on the ground the spread is uneven.

Co-operative banks, which were initially set up to help lend in the rural areas, haven’t been successful because many have high ratios of bad loans and lack funds.

The number of microfinance firms, however, is increasing in India.

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Source: Wall Street Journal (link opens in a new window)