Saturday, August 05, 2006

Farmer suicide continued

A short while ago, I had written about the farmer suicide problem. Now Business World has an excellent editorial on the farmer suicide problem:

Four weeks ago, the Prime Minister visited villages in Vidarbha where farmers had committed suicide. After hearing the stories of their distress from those that were left behind, he announced a relief package amounting to Rs 3750 crore : Rs 712 crore in interest to be written off, Rs 1275 crore in fresh credit, and the rest to fund irrigation, water harvesting and seed improvement. This practice of throwing money at problems is so common amongst politicians that it hardly attracts comment. They buy votes with taxpayer's money. Politicians all over the world do it; if they do it somewhat more egregiously in India, that is what Indian democracy is about. But when it is adopted by a Prime Minister who once was a renowned economist, it evokes questions about which turban he is wearing. For he cannot be unaware of the incentive effects of his actions. If some farmers are forgiven their interest liabilities, they will ask why it should not happen again. Others will ask why they do not deserve the same bounty. Many borrowers will stop paying interest, hoping that when they are asked to pay, they will make up some hard-luck story and get by. Giving fresh loans to defaulters has similar incentive effects. Having been rewarded once for defaulting, they will expect further rewards. And borrowers with an impeccable record will ask themselves why they should pay when others do not. The cost is initially borne by banks, and when they cannot bear it any more, the central government pumps taxpayer's money into them. To a soft-hearted politician, the above considerations will seem devoid of pity. How can one just stand by and watch when farmers are committing suicide? For every suicide there are a hundred farmers going through unbearable financial distress. Such crises are what politics is supposed to address. The press is a spoilt, hypercritical brat. It will criticize any meritorious act. But its attention span is short; soon something else will catch its attention, and it will forget the farmers. What is sad and surprising in this affair, is that although the Prime Minister himself once wrote theses and papers analysing economic problems, he has no interest in analyses of the problems he has to deal with. The problem is not confined to Vidarbha, but is endemic in the Deccan trap, consisting of inland Maharashtra, Andhra and Karnataka. The rainfall in this region is insufficient for rice or sugar cane. So farmers in these areas are confined to dry crops. Amongst these crops, the dry foodgrain crops lost out over the years when cheap (some would say subsidized) wheat and rice came to be sold all over the country; today, jowar, bajra and ragi are largely forgotten. When these crops became uneconomic, the farmers of the Deccan Trap turned to cotton. Cotton is subject to the triple risk of rainfall, pests and prices. Pests can be tackled, but pesticides are expensive; and more recently, expensive high-yield seeds have become available. Both require investment. It should ideally come as risk capital. But farmers cannot set up companies or raise equity. So the capital has come as fixed-interest loans. Banks have from time to time been forced to lend; but they do not like lending to cotton farmers on account of the risk; so the lending business has been largely in the hands of private money-lenders. There are laws going back to late nineteenth century against exploiting farmers. But the returns are high enough to cover the risk, so moneylending has continued to flourish. The Maharashtra government has tried to protect farmers against price fluctuations by guaranteed purchases. But it did not want a situation in which it had to buy all the cotton that was offered in years when prices were low, and get none when prices were high. So it has instituted monopoly procurement - with the result that Maharashtra farmers miss out on price booms. Its monopoly procurement scheme is extremely unpopular, not least because of delayed payments and corruption; farmers routinely smuggle cotton out of Maharashtra. Manmohan Singh may be a master of economics, but he is a prisoner of politics. He can do nothing to dismantle Maharashtra's monopoly procurement scheme. He cannot force the Maharashtra government to act against politically powerful moneylenders; an MLA from Buldana is reputed to be Vidarbha's most prominent agricultural moneylender. And the Prime Minister is too conscientious to abandon his job as long as he thinks he has a chance of doing something good for his country - or at any rate of preventing another politician from doing harm. So the only option he sees is to throw money at problems, knowing full well that money nourishes and multiplies problems.

2 comments:

  1. Dear Sir,

    I have been reading some articles on micro-credit and have developed a keen interest in the area. Your articles on farmer suicides were an eye opener.

    It is well acknowledged now that micro credit and poverty alleviation programmes are inextricably linked due to the potential of micro credit programmes to link the formal banking structures with the rural poor by mobilizing their savings and promoting entrepreneurial endeavours. However, in spite of several decentralized attempts, the results achieved have been far from satisfactory. Mapping the model of Grameen Bank of Bangladesh on the Indian context has given dismal results till date(to the best of my knowledge). I fail to understand the exact reasons for the same. The possible reasons I visualize are only two:

    1.Lack of funds pumped into micro-credit by banks mainly due to high default rates

    2.Inefficiencies in the operations of rural financial institutions (RFIs)leading to misallocation of credit, inefficient recoveries leading to high default rates.

    I have the following two questions, if you could kindly take out some time to answer them:

    1. What are the most conspicuous reasons for the failure of micro credit models as the likes of Grameen Bank of Bangladesh in India?

    2. If lack of funds is one of the prominent reasons, why dont banks follow some different approaches such as securitization of rural credit? (Based on my limited knowledge, I know that ICICI started two initiatives in this field, but failed! Again I do not get the reasons here)

    Thanks & Regards,
    Rakesh

    1.
    Rural credit markets are characterised by high cost of enforcement, imperfect information, collateral security, underdevelopment in complimentary institutions and covariant risks.

    ReplyDelete
  2. As you say at the end, there are genuine problems of information and incentives in a credit transaction. To the extent that micro credit introduces new innovations which overcome these problems, that can help. To the extent that NGOs are subsidised by donations, or to the extent that NGOs are running ponzi schemes which are not actually viable, micro credit is not a genuine answer to the problem but more a way for some individuals working in NGOs to feel nice about themselves.

    And then there is the question of scale. Can micro credit initiatives become big enough to matter? My sense is that the problems of incentives and management inherently limit the ability of an NGO to scale up to a nontrivial-sized organisation. ICICI Bank is trying some very interesting things in trying to marry the strengths of formal finance and the strengths of micro credit. The jury is still out on whether this works well on a scale that matters for India. You might find Microfinance in India: Odysseus or Interloper?title by Pradeep Shrivastava to be of interest.

    My view is that micro credit is a nice side story. It is nice, but it is only a side story. My view is that the big places where credit constraints will be eased are using good collateral (loans against securities), and when there is no collateral, through credit cards. There are mistakes in banking regulation through which banks have a bias in favour of low quality collateral like real estate or cars and a bias against securities which are the best collateral, but in the long run, those should get sorted out.

    My post on credit constraints might also interest you.

    ReplyDelete

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