Loan waivers won’t stop farm suicides

The condition of India’s farmers is not a happy one and the number of farmers’ suicides is a manifestation of their indebtedness, widely seen as the cause of the suicides. Political parties regard farmers as a key voting bloc and, prior to any major election, they tend to address them sympathetically by promising loan waivers. But the issue is whether there is a likelihood of loan waivers reducing the incidence of suicides.

Loan waivers are not to be confused with write-offs – that often involve corporate debt. Write-offs are entirely book adjustments not accompanied by the ending of recovery measures, while waivers relinquish recovery options. Corporates with their loans written off are still ‘defaulters’ but not so farmers with their loans waived, who are eligible for fresh loans.

There is not much agreement about the causes of farmers’ suicides, except that indebtedness is the dominant one. Studies have shown that suicides in India are a very different phenomenon than that in the high-income countries (HICs). In HICs, suicides are evenly distributed across rural and urban areas; suicides in rural areas in India are almost twice as many as in the urban areas.

The most common method of suicide in India is the ingestion of pesticides, lending credence to farmers being most prone to suicide. But, while economic issues are no doubt primary, there is little evidence that poverty is the biggest cause. In fact, Kerala, one of the most successful states in terms of human development, has a suicide rate nearly 10 times that of Bihar, widely known as one of the least developed.

Other issues suspected as having a bearing on suicides are farmers being from the marginal category (land up to 2.5 acres) and/or choosing cash crops, although these connections are not properly established. Genetically Modified (GM) cotton has been widely blamed for suicides but this may be more on account of farmers misusing the seeds rather than any fault with the seeds themselves.

Another issue to be considered is the unreliability of suicide data because of the compensation offered by governments to the families of victims. There have been cases where family members have ‘faked’ a suicide when a farmer died of natural causes. One case is cited where a widow thrust an empty bottle of pesticide between the lips of her dead husband, in an unsuccessful attempt to become eligible for compensation.

As for suicides due to indebtedness, there is a consensus over the link between suicides and informal borrowing. Microcredit agencies charge usurious rates of interest but their outlay per borrower is small. It is also not viable to use microcredit for farming activity.

Moreover, microfinance borrowers are usually women who are not in charge of farming or its finance. Private moneylenders pressure their debtors in extreme ways, which official lenders like banks cannot do, and there is evidence that private borrowing from unofficial financiers is largely responsible for suicides.

But one cannot also assume that indebtedness is only because of farming activity; one must also provide for consumption expenditure and traditional social necessities like weddings, not covered by formal lending, which look at end-use. Overall, debt survey reports reveal that the relative share of informal sources in overall indebtedness increased over the last decade, despite an increase in formal credit flows.

Illogical measures

Given the above factors, what is the logic of loan waivers by governments, which apply only to formal borrowings from banks? There is none at all, and it has been shown convincingly that loan waivers do not reduce suicide rates. What happens, instead, is that the announcement of a waiver reduces repayment of loans by even well-to-do agricultural borrowers — in the expectation that they will benefit.

It should also be noted here that the effect of such announcements is widespread and does not confine itself to the segments named. If CM-aspirants like B S Yeddyurappa announce a ceiling of Rs 1 lakh, defaults include much larger loans. There is hence pressure on the financial sector, already burdened by non-performing assets.

Contrary to the popular understanding that loan waiver is a remedy for farmer suicides, the two are actually independent evils that need to be dealt with separately. As regards farmers’ suicides, no remedy seems to be in sight. It would be useful to have an exhaustive study conducted first linking suicides to issues like category of borrower, purpose of the loan and category of lender. Without knowing the dominant reasons for the suicides, all so-called remedies are futile.

As regards loan waivers, no governmental measure to put a permanent stop to them is possible, since it will be presented immediately as ‘anti-people’. Tactful publicity revealing the disconnection between formal lending and farmers’ suicides might prepare the ground to end future waivers. But governments need to make material differences to farming by setting up cold storage plants, stabilising produce prices and reducing the gap between what the farmers realise and the prices paid by the ultimate consumers.