Bharat Jhunjhunwala

Policymakers appear blind to the fact that increased lending to farmers is counter-productive in the face of declining market prices.

The Agriculture Minister, Mr Sharad Pawar, is pushing farmers deeper into the quicksand of credit. Increased agricultural lending by banks is leading to more suicides by farmers, not less.

The main problem of the farmers is the declining prices of agricultural commodities. The savings from cheaper credit is cancelled out by the lower prices. The benefit is actually reaped by the urban and foreign consumers.

Addressing the National Development Council in June 2005, Mr Pawar held the following factors responsible for suicides by farmers — crop loss, failure of monsoons, indebtedness, mono-cropping, dry-land agriculture and fragmentation of land holdings.

Replying to Rajya Sabha debates on farmer suicides in March 2005, he attributed them to less water in wells, high credit rates, of 24-36 per cent taken from moneylenders, and non-availability of quality seeds.

No doubt all these have contributed to the problem. But the main reason is the declining prices of agricultural commodities. Monsoons, for example, failed earlier as well.

Buffer denied

But high prices during good years enabled farmers create a reserve fund for facing such calamities. This author had visited drought-stricken areas of Bikaner in Rajasthan two years ago. Farmers and bank managers repeatedly confirmed that fixed deposits were being encashed to manage the drought. Farmers are unable to create such reserves because of low prices. Left with no cushion when drought strikes, they take the extreme step of suicide. The same logic applies to the other reasons cited by Mr Pawar.

Providing increased credit at lower rates of interest will be ineffective in the face of falling prices. The consequent reduction in cost will be passed on to the consumer in the form of lower-priced produce. The farmer's income will stagnate. In fact, he will sink deeper into the quicksand of credit.

Widespread confusion

The problem is not restricted to Mr Pawar. Many economists appear confused on the issue. The Tata Institute of Social Sciences, Mumbai, conducted a study of farmer suicides in Maharashtra.

It concluded that while the cost of cultivation of most crops had increased owing to higher input prices, the absence of a corresponding increase in the prices of the produce had affected the viability of farming. But instead of focusing on the need to raise farm prices, it concludes that crop failure, limited irrigation, government apathy, and lack of access to agriculture-related information were largely responsible for the despair of the farmers. A study by Anita Gill of Punjabi University, Patiala, concluded that farmer suicides in Punjab were the result of "market failure to provide right kind of prices both of the produce and credit." But, ignoring this aspect of the problem, she recommends that "state-run financial institutions would have to alter their system of lending — loans would have to be made adequate, timely, cheap and commensurate with demand."

Such cheap credit benefits the urban consumers, not the farmers. The decline in cost of production is matched with a decline in prices of the produce. In the end, the farmers' income remains low while the urban consumer gets cheaper goods.

The other policy initiatives suggested by Mr Pawar such as drip and sprinkler-irrigation systems, contract farming with assured prices, and additional incomes from production of milk, fruits and vegetables would also prove ineffective if the product prices continue to decline. No one is disputing the necessity for cheaper credit, government investment in irrigation and the other measures suggested by Mr Pawar. But these measures cannot succeed unless policies to raise prices are not put in place simultaneously.

WTO pressures

Interestingly Mr Pawar disowns this problem. At the National Development Council he asserted that the primary responsibility of securing the welfare of farmers belonged to the State governments as agriculture was a State subject. Mr Pawar forgets, however, that export and import of agricultural goods is a Union subject. The WTO provisions were accepted by the Union Government without consultation with the State governments. The Union Government is opening up imports of subsidised food products from developed countries and this is an important reason for the falling prices.

Mr Pawar should realise that the measures he has suggested cannot secure the welfare of farmers. It is not right to implement schemes that benefit the urban consumers and pass them off as pro-farmer initiatives.

(The author is a New Delhi-based freelance writer. bharatj@sancharnet.in)

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