NSSO Data’s Clinching Evidence: Farm Waivers Won’t Help, Especially Poor Farmers

After the Congress solo meeting with Prime Minister Narendra Modi on the issue of farmers’ distress (leaving other opposition parties miffed), Rahul Gandhi said Modi was silent about the demand to waive off farmers’ loans. At a public rally soon after, Gandhi reiterated the waiver demand.

The Congress has always claimed credit for doing more for farmers than any other government, especially during the United Progressive Alliance (UPA) years. Indeed, the Manmohan Singh government did announce a plan to raise agricultural credit by 30 per cent a year and finance 100 farmers per bank branch. Between 2004-05 and 2012-13, not only did the target set for rural credit increase from Rs 10,500 crore to Rs 575,000 crore, but the achievement significantly exceeded the target every year, according to Agricultural Ministry data.

But the recently-released Household Indebtedness in India report of the National Sample Survey Office (NSSO) raises quite a few questions about what actually happened on the ground. The report is based on surveys conducted between January and July 2013 on the status of debt as of June 2012.

If the UPA did give this huge push to institutional lending to agriculture, how come the survey report shows that the share of credit from institutional agencies for farming households fell from 61 per cent in 2002 to 58 per cent in 2012 (the UPA was in power for eight of those 10 years)? The share of credit for non-farming households increased from 46 per cent to 49 per cent over the same period. If this is because of more rural households taking up non-farming activities, there’s nothing wrong with that, but was the shift distress-driven because farming was not seen as remunerative?

Overall, too, the share of institutional agencies in total debt in rural areas fell marginally from 57 per cent to 56 per cent between 2002 and 2012 against a handsome rise from 75 per cent to 85 per cent over the same period in urban areas.

Second question: if there was this huge agriculture lending push during the UPA years, why did the share of debt taken for productive purposes decline from 53 per cent in 2002 to 40 per cent in 2012 while that taken for `other purposes’ (generally taken as household expenditure) grow from 47 per cent to 60 per cent over the same period?

Within the productive purposes category, the share of debt taken for capital expenditure for farm business fell from 27 per cent to 13 per cent between 2002 and 2012, after a surge from 23 per cent to 53 per cent between 1991 and 2002. The share of current expenditure in debt taken for farm business increased marginally from 14 per cent to 15 per cent while the share of capital and current expenditure taken for non-farm business remained stagnant.

But apart from raising questions about Congress claims about the UPA government’s performance, the report highlights the continuing structural issues with regard to indebtedness among households, especially rural ones.

The main issue is, undoubtedly, the inadequacy of formal lending channels in rural areas. The report points out that 19 per cent of rural households had taken credit from non-institutional agencies against 17 per cent from institutional agencies. In urban areas, the skew is in favour of institutional lending – 15 per cent of urban households had tapped institutional sources for debt against 10 per cent in the case of non-institutional sources.

Debt waivers by the government, or at least demanding them, is seen by all political parties as the best way to help farmers, especially poor farmers. The government, however, can only waive debt in public sector banks and government financial institutions. But of the 56 per cent of loans given by institutional sources in rural areas, commercial banks, including regional rural banks, account for only 25 per cent; another 24.8 per cent is accounted for by cooperative societies and cooperative banks.

What’s more, government debt waivers are likely to benefit the larger and richer farmers more than the poor ones. The report notes that the indebtedness of rural households at the bottom five of the income scale from only non-institutional sources (15.8 per cent) was higher than from institutional sources (7.42 per cent). On the other hand, in the case of the top five income categories, the share of debt from institutional sources was higher (17.42 per cent) than from non-institutional sources (13.36 per cent). The top five income groups were also better placed to get loans from both sources than the bottom five income groups.

This bias (greater exposure to non-institutional sources of debt by the poor) is also reflected in the urban areas, though overall access to institutional credit is higher. Of the 85 per cent loans from institutional agencies in urban areas, 57 per cent is from commercial banks, with cooperative societies and banks accounting for another 18 per cent.

What is worrying is that money-lenders account for the largest – and most significant – chunk of non-institutional sources. In rural areas, of the 44 per cent credit accounted for by non-institutional sources, 28 per cent is from professional money-lenders and another 5 per cent from agricultural money-lenders. In urban areas, professional money-lenders account for 10.5 per cent of the 15.5 per cent of total loans advanced by non-institutional sources.

This has implications for interest rates as well. Between 91 and 97 per cent of rural households who had taken loans from landlords, agricultural and professional money-lenders paid interest upwards of 15 per cent (even going above 30 per cent). Against this, the bulk of borrowers from banks and the government paid up to 15-20 per cent interest (the biggest chunk is in the 6-10 per cent interest bracket).

In both rural and urban areas, households at the bottom quintile took a big chunk of debt for non-business purposes, with the poorest taking a bigger share for such use. In rural areas, the share of loans taken for non-business by the bottom quintile was in the range of 77-89 per cent. The skew towards non-business is there in the case of the higher income groups as well (barring the top-most 5 per cent of households, where the share of business-related loans exceeded that of non-business loans), but the difference is not so stark.

In urban areas, the bias in debt for non-business is uniform across all income groups, with the share ranging from 76 per cent in the top-most quintile to 99 per cent in the bottom-most quintile.

Unfortunately, in their constant one-upmanship games, political parties only use such reports to bawl out their rivals, instead of framing policies and suggesting solutions that make a genuine difference.