In the last eight years, farmers' debts have increased much more than their income. Does this signal a debt trap farmers are getting into?
Farmers' income rose by 30 per cent while their debt surged around 58 per cent between 2013 and 2019. As a result, farmers' debt as a percentage of their annual income shot up by 13 percentage points, according to latest data released by the Ministry of Statistics and Programme Implementation.
But is the rising credit culture among farm households a bad outcome per se? If the loan is taken to buy farm machinery or to invest in crop diversification, it may boost future income.
Plausible reasons for rising indebtedness
"Increasing access to institutional finance; increasing farm mechanisation (almost 95 per cent tractors are taken on loans); and increasing high value agriculture are some of the reasons behind increasing farmers' indebtedness," Ashok Gulati, Infosys Chair Professor for Agriculture at ICRIER, told India Today Data Intelligence Unit (DIU).
Also, due to concessional credit to agriculture, a lot of diversion of agri loans for non-agri use, especially in Punjab, Kerala, Tamil Nadu and Andhra Pradesh, have taken place, he added.
Easy agri credit
DIU also reached out to another noted agri economist, Ashok Vishandass, who is a professor of applied economics at the Indian Institute of Public Administration. "Due to relatively easy availability of loan over time, it is expected that availing of loan increases as easy supply of credit creates its own demand for it," he said.
While ease in agriculture credit is one of the most plausible reasons, a fall in profitability cannot be ruled out too.
"Rising levels of indebtedness in states with already high levels of farmers' debt may be pointing to agriculture becoming less profitable," former agriculture secretary Siraj Hussain told DIU. "We don't know how much of these loans are flowing into consumption," he added.
While more loans may indicate more investment in the sector, eastern and north-eastern states have a much lower credit offtake.
Is growing incidence of loan waiver the reason why farmers are liberally going for credit? "One of the reasons for rising indebtedness is the loan waiver schemes. If I know that I do not have to repay the loan, I will keep taking loans," Bimal Kothari, vice chairman, India Pulses and Grains Association (IPGA), told DIU.
In recent years, outstanding loans have dramatically surpassed the loan amount issued.
Loan waiver schemes are intended to alleviate the debt overhang of beneficiaries and enable them to undertake productive investment to boost real economic activity. The government gives loan waivers to highly indebted farm households to free up lines of credit and enable them to make new investments.
Experts observe that with more agriculture loans being waived-off, it is easier for farmers to take loans without the fear of repaying the amount if there is a loss.
This impact of loan waiver could be both in loan performance, as borrowers choose to default strategically in anticipation of future bailouts, and in credit allocation, as banks reallocate lending to lower risk borrower segments, said an RBI report of the Internal Working Group to Review Agricultural Credit.
However, the Internal Working Group had recommended that governments should undertake a holistic review of agricultural policies and their implementation and avoid loan waivers. It said that loan waivers that mostly happen at the time of elections are not the panacea to address underlying risks emerging from nature and markets.
How MSP fared
The minimum support price of major crops has increased at 7-9 per cent since 2003-04. MSP for bajra and arhar grew at a CAGR of 8.65 per cent and 8.89 per cent respectively since 2003-04.
"It may be kept in mind that MSP is an instrument of pricing, not of income. Whatever be the input prices, MSP is to be at least 50 per cent more than the cost," Ashok Vishandass added.