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Punjab Peasants in the Grip of Indebtedness

A recent study throws light on the indebtedness of peasants in Punjab — the state with the most commercialised agriculture in the country, and one in which the network of commercial banks and cooperative societies is relatively widespread. We are summarising it in detail here not only because it is itself interesting, but because it is relevant to studying the problem of peasant indebtedness throughout the country.

The study, "Rural Credit and Indebtedness in Punjab (1997)", by H.S. Shergill of the Institute for Development and Communication, Chandigarh, was undertaken for the Department of Cooperation, Government of Punjab. The objective of the study was to examine the nature, extent, and burden of farmers’ debt in Punjab, and the availability of short-term and long-term credit to them from different credit agencies. It is based on a sample of 260 farmers located in 13 villages selected proportionately from the five agro-climatic zones of the state, for the year 1997.

The study reveals an agricultural economy in a state of crisis (although the authors of the study do not put it that way). Costs of cultivation are large and growing fast, while yields are stagnating or even in some cases falling. As a result, the Punjab peasant needs to borrow heavily. However, credit from banks and cooperatives accounts for just 40 per cent of the short-term borrowings — and just 30 per cent in the case of small and semi-medium farmers. The remaining needs are met by borrowing at high interest rates from commission agents. Seventy per cent of small peasants are unable to repay the whole of their short-term debts, and a large amount remains outstanding against them at the end of the year. The interest payments on total debts (short- and long-term) amounted to at least 11 per cent of value added in agriculture in the state, according to the study’s calculations.

Rapidly growing cultivation costs; stagnating yields

The study begins by pointing out the rapid changes in Punjab’s agriculture with the ‘Green Revolution’: between 1960-61 and 1990-91 farm production grew at 5.05 per cent a year, with wheat and rice output growing as fast as 6.69 and 11.8 per cent per year.

But costs, too, have risen: the use of chemical fertilisers has grown at the rate of 18.3 per cent/year, tractors at 13.7 per cent, and tubewells at 15.2 per cent. The story is similar for insecticides and other modern inputs. Thus the cash expenditure per acre grew between 1974-75 and 1991-92 at an annual rate of nine per cent in the case of wheat, 11.2 per cent in the case of paddy, and 9.8 per cent in the case of cotton. It appears the cash expenditure on farm inputs has grown even faster than farm output.

Cash outlays for cultivation are heavy. The study estimates the cash expenditures per acre in 1996-97 on cotton, paddy and wheat at Rs 2674, Rs 4485, and Rs 2810 respectively (worked out on the basis of the reports of the Commission for Agricultural Costs and Prices — although it is not explained how these have been calculated from the CACP figures). Rent on leased-in land accounted for over one-tenth of these costs; hiring of machines consumed between 4.6 and 14.2 per cent for the three crops; and hired labour between 18.1 per cent and 31.4 per cent. Fertilisers and chemicals consumed between 25.1 and 32.6 per cent of the cash expenditure for the different crops.

Even as expenditures mount, a disturbing development is taking place: the stagnation and even fall in yields per acre of various crops. The study gives the following compound growth rates of yield/acre between the average for the triennium ending 1987-88 and the triennium ending 1995-96: wheat: 1.79 per cent/year; rice: 0.38 per cent; cotton (A): (-) 0.50 per cent; cotton (D): (-) 0.25 per cent; maize: 0.63 per cent; sugarcane: 0.32 per cent; rapeseed and mustard: 1.56 per cent; potato: 0.02 per cent; moong: (-) 7.51 per cent. The net value of all crops per operated acre, at 1980-81 prices, grew at the compound growth rate of just 0.27 per cent/year.

These data are from the Statistical Abstract of Punjab, but the survey data reveal an even more disturbing picture for the three principal crops. Over the five zones covered in the survey, between 27.8 and 45.8 per cent of farmers reported a fall in their wheat yields over the previous three years. For paddy, the percentage of farmers reporting falling yields ranged between 8.3 per cent and 58.3 per cent. The most striking figures are for the three zones in which cotton is grown: 42.7, 66.7, and 87.8 per cent of farmers growing cotton in Patiala-Fatehgarh Sahib-Sangrur, Bhatinda-Mansa, and Ferozepur-Faridkot-Muktsar-Moga regions, respectively, reported a fall in cotton yields over the previous three years.

Short-term borrowings to finance crop production

The survey found that in Punjab a very large proportion of farmers in all size categories of holdings borrow to finance their crop operations. (The survey has categorised farmers according to their operated area, not owned area. Farmers have been categorised as "small" — operated land upto five acres; "semi-medium" — five to 10 acres; "medium" — 10 to 15 acres; and large — 15 acres and above.) While it is not surprising that 84.3 per cent of small farmers, 90.1 per cent of semi-medium farmers and 85 per cent of medium farmers borrow to meet cultivation costs, what is unexpected is that even 89.5 per cent of large farmers do so. However, the latter are actually much less dependent on borrowings, since the amount they borrow per acre is much less — Rs 2,488, as compared to Rs 4,536 per acre for small farmers. The data shows, unsurprisingly, that as holding size increases, dependence on borrowing decreases.

The study then uses the data it has gathered to work out estimates for the state as a whole. Table 1 gives us a break-up of the short-term credit from different agencies. Clearly, commission agents dominate the rural credit market in Punjab: they meet the short-term credit needs of almost two-thirds of the farmers, and provide 61.3 per cent of the total short-term credit in the state. While cooperative societies also extend significant credit, as the table shows, commercial banks are virtually irrelevant to short-term credit needs of the farmers.

Table 2 tells us that over a third of farmers were unable to repay their borrowings from different credit agencies, and that over a fifth of the total borrowings remained outstanding at the end of the year. The proportions were particularly high for the loans from commission agents — almost two-fifths of borrowing farmers (ie just over a quarter of all farmers in the state) were unable to repay their loans from commission agents, with outstandings amounting to almost a third of the sum borrowed. The survey also revealed that the percentage share of total outstanding short-term loans was higher in the case of small and semi-medium farms than their shares in the operated area of the state.

The borrowed amount per borrowing farmer is high: Rs 32,362. The borrowed amount per operated acre of the borrowing farmers comes to Rs 3,590 (for rabi and kharif crops together).

The dependence on commission agents varied with the size category of farmer. Small and semi-medium farms depended on commission agents for about 70 per cent of their short-term borrowings. But medium-sized farms depended on commission agents for just less than half of their short-term borrowings, and were able to get short-term loans from cooperatives for their remaining needs, as well as a small amount from commercial banks. (Curiously, even large farms drew on commission agents for 72.7 per cent of their short-term borrowings, but since their borrowings per acre were far less than in the case of small and semi-medium farms, this does not signify levels of dependence similar to the small farms.)

Short-term loans: amount outstanding as a proportion of loan

A much larger than average proportion (70 per cent) of small farms report short-term loans outstanding even after harvesting. Even in the case of semi-medium and medium farms, 40 per cent and 47 per cent respectively could not repay the entire amount borrowed. Surprisingly even 28.3 per cent of the large farms also could not repay the entire amount borrowed to finance cultivation. The outstanding amount per operated acre of the farmers with outstanding loans was, naturally, highest in the case of small farmers, at Rs 3,396 per acre. Small farms also had the highest proportion of outstanding to borrowing, at 27.7 per cent.

As Table 2 shows, the proportion of outstandings to loans taken was highest in the case of loans from commission agents: 39.5 per cent of farmers borrowing from commission agents failed to repay 32.3 per cent of the amount borrowed. The proportion was also quite high in the case of commercial banks, but lowest in the case of cooperative societies. Out of the total outstanding amount of short-term loans, virtually the entire amount (88.66 per cent) was due to commission agents.

Interestingly, the proportion of outstandings to short-term loans taken from commercial banks shows the opposite trend: while small farmers’ outstandings were only 7.3 per cent of the amount borrowed, large farmers had a whopping 37.6 per cent outstanding. Perhaps this indicates that they could exercise their clout to avoid repaying banks — even as they paid their loans from other agencies.

Long-term loans for productive purposes

Cultivators also take long-term loans for productive purposes such as purchasing machinery, installing tubewells, and so on. The survey could not find a single farmer who had borrowed from informal agencies such as commission agents for such purposes. Commercial banks extended 55.6 per cent of such loans, and the remainder was extended by cooperative land development banks. The total amount of borrowings made in Punjab as a whole for such purposes over the previous few years was Rs 2,671 crore, of which Rs 1,448 crore was outstanding at the time of the survey. (In this case "outstanding" does not indicate a failure by the borrower to repay the debt, since these are long-term debts, to be paid over a length of time. This merely indicates the debt on which interest and principal have still to be paid.)

According to the survey, 27.5 per cent of all farmers in the state were borrowing for such purposes. While a higher percentage of medium and large farms borrowed for long-term productive purposes, the amount borrowed per acre was higher in the case of the small and semi-medium farms. The totals for the whole state reveal that the share of small and semi-medium farms in long-term productive borrowings (24.7 and 36.8 per cent, respectively) is larger than their share in the operated area of the state (12.2 and 20.9 per cent, respectively). The burden of live debt on this account on these two groups is Rs 357.2 crore and Rs 532.7 crore, respectively.

Long-term non-productive loans

Cultivators also take loans for non-productive purposes such as house-building, weddings and other ceremonies, consumer durables, etc. The picture here is just the reverse of long-term productive loans: the entire amount is lent by informal agencies. The smaller the farm size, the greater the incidence of non-productive borrowing and burden of debt: 27.2 per cent of small farmers and 22 per cent of semi-medium farmers reported such borrowings, compared to 10.7 per cent of large farmers. The amount outstanding per acre is Rs 5,745 in the case of small farm borrowers, and Rs 9,908 in the case of semi-medium farm borrowers, compared to Rs 2,114 and Rs 2,923 in the medium and large categories, respectively. The share of small and semi-medium farms in outstanding non-productive long-term loans was almost double their respective shares in operated area in the state. Clearly, the burden of non-productive long-term debt is much higher on small and semi-medium farms.

Mortgage debt

As we have seen, the burdens of short-term, long-term productive, and long-term non-productive debt all fall more heavily on small farms, when measured in terms of debt per acre operated. A substantial proportion of short-term debt remains outstanding against the borrowers, particularly the small farms. When unable to repay loans, or at times even pay the annual interest, cultivators resort to mortgaging their land. The mortgagee takes over the land in lieu of a loan which he extends to the mortgager. The mortgagee does not pay any rent on the land, nor does he charge interest on the loan. The rental value of the land is, in effect, the interest he gets on his loan. Of course, if the farmer mortgaging his land is unable to repay the loan, the mortgagee gets to hang on to the land till repayment is made. This can therefore be a route to land alienation.

The percentage of farmers who have mortgaged some of their land is small in the case of semi-medium, medium and large farmers: two per cent, two per cent and 3.57 per cent respectively. However, a significant proportion of small farmers had mortgaged their land: 13.6 per cent had mortgaged some land, amounting to 4.5 per cent of the total lands owned by this category. Small farmers accounted for 60 per cent of all mortgage debt in the state, and the amount they received as mortgage money was as much as Rs 11.7 lakhs per mortgaging farmer.

Total indebtedness of Punjab farmers

Taking all the above together, the study estimates the total debt of Punjab farmers at Rs 5700.9 crore, out of which 54.7 per cent was short-term credit for cultivation, 25.4 per cent was long-term credit for productive purposes, 12.8 per cent was long-term credit for non-productive purposes, and 7.1 per cent was mortgage debt on mortgaged-out land.

The break-up by credit agency was as follows: 19.4 per cent was owed to commercial banks and 27.1 per cent to cooperative societies and cooperative land development banks, giving a total of 46.5 per cent in the institutional sector; whereas 46.3 per cent was due to commission agents, and 7.1 per cent to mortgagee farmers, giving a total of 54.4 per cent in the informal sector.

The burden of debt declines as holding size rises: Rs 10,105/acre for small farms, Rs 7941/acre for semi-medium farms, Rs 4228/acre for medium farms, and Rs 4230/acre for large farms.

Total interest burden on Punjab farmers

The study calculates the interest burden by assuming an interest rate of 14 per cent on institutional debt and 24 per cent on informal sector debt. Curiously, while saying at the outset of the study that "very little is known" about the interest rates charged by informal sector agencies, and that one of the survey’s aims was to generate information about such agencies, it does not appear to have asked the respondents for information about the interest rates at which they were actually borrowing from the informal sector. We are not given any explanation for the decision to assume the interest rate on informal sector debt to be 24 per cent. Certainly this is much lower than what one knows of other states.

By the above method, the study calculates that the annual recurring interest charge on farmers’ debt in Punjab is Rs 1,102.8 crore, which works out to about 11 per cent of the net income generated by agriculture in the state. To look at it another way, this sum amounts to 21.5 per cent of the rental value of all the land in the state.

The study notes: "Looked at from another angle, it may be seen that total debt is about 70 per cent of the net state domestic product originating in agriculture in the state in a year. It means that almost three-fourths of one year’s agriculture income of the state has to be paid if the total amount of debt is to be liquidated. When the total amount of debt is compared with the total rental surplus originating in agriculture in the state in a year, it is seen that total debt is 32 per cent more than the rental surplus of one year (notionally calculated at the rate of average cash rent per acre prevailing in the surveyed villages) of the entire farm land of the state.... Looked at from another angle it may be seen that 13.25 per cent of total farm land area of the state must be mortgaged out by farmers (at the current going rate per acre of mortgage money) to meet the annually recurring interest charge on total debt. All these indicators point towards quite a heavy burden of debt on Punjab farmers compared to the value of land owned by them. This burden is further highlighted when we observe that 90.42 per cent of the total cash expenditure incurred by farmers in the state on raising crops has to be borrowed and they do not have any surplus savings of their own to carry out crop production operations." (emphasis added)

Does the credit system work well for the peasants?

The survey also asked farmers their own perceptions about questions related to indebtedness. As many as 86.3 per cent of the surveyed farmers admitted to being dependent on short-term credit for cultivation. More than half of these borrowing farmers revealed that they routinely borrow from more than one credit agency.

Throughout the study, a strange assertion crops up again and again. When mentioning that the amount of short-term credit per acre borrowed by small and semi-medium farms was higher than for medium and large farms, the study asserts that this demonstrates that "the smaller farms are not at any disadvantage so far as the availability of credit to them is concerned." Elsewhere: "the share of short-term credit is higher compared to their respective share in the operated area of the state in the case of both small and semi-medium holdings... It can, therefore, be safely concluded that short-term credit market in Punjab agriculture has not been working to the disadvantage of smaller farms." This is repeated in the conclusions of the survey, which, we must not forget, has been carried out on behalf of a Government department, and will be used as a justification for future Government policy.

Similarly, when the survey finds that four-fifths of the farmers experience no difficulty in getting enough short-term credit and getting it in time, it concludes that "one gets a very encouraging picture about the working of short-term credit system in the rural areas of the state and a great majority of the farmers seem to be quite satisfied with the availability of short-term credit."

These conclusions are strange, to say the least. The greater share of small and semi-medium farmers in short-term credit is not a sign of the efficiency of the credit system but of the weakness of small farmers: the reason small farmers borrow 82 per cent more per acre than the large farmers is precisely because they have no surplus to draw on to meet the costs of cultivation. Medium farmers, by contrast, are able to draw a much greater proportion of their short-term loans at lower interest rates from cooperative societies. Because short-term credit available to them from the institutional sector is so insufficient, the small farmers are in effect driven to borrow 70 per cent of their short-term credit needs from commission agents, who charge at least 24 per cent. The high interest rates are quite likely a factor in the inability of the small peasants to repay a third of their short-term loans, as a result of which their debt accumulates. What clearer evidence could one produce of the way in which the credit system works to the disadvantage of smaller farms?

The survey itself reveals that 62.7 per cent of the farmers felt that their dependence on borrowed money adversely affected their crop operations; 58 per cent felt the timeliness of their crop operations is affected by such dependence; 58 per cent also felt that the quantity of farm inputs they buy is reduced for the same reason.

The study even says that farmers "prefer" to go to commission agents for short-term loans, rather than go to the institutional sector. Given that the interest rates charged by commission agents are at least 10 percentage points higher than the interest rates charged by banks, why would farmers "prefer" the commission agents? The fact is, credit of the order required for cultivation is simply not made available from the institutional sector — not merely for lack of applicants. As a result, banks are not interested in stretching themselves to make loans to farmers, and the farmers’ problems with "paperwork" to get loans are a logical outcome of this. Not surprisingly, the reason cited by 63.6 per cent of farmers for choosing one or the other credit agency for short-term credit was the "ease of getting loans". As many as 91.2 per cent of the farmers had never taken a loan from a commercial bank.

The survey also notes: "There was also considerable dissatisfaction among the farmers borrowing from commission agents: 79 per cent of those borrowing from commission agents felt that commission agents are charging very high interest rates on these loans; 31.8 per cent of commission agents’ farmers felt [that there was] even some tampering of their credit accounts by the commission agents; 56.2 per cent of farmers borrowing from commission agents felt they charge higher than market price for fertilizers sold to farmers on credit; 36.2 per cent of commission agents’ client farmers complained of getting a lower than market price for their produce because they have to sell through their commission agents on compulsion." If, despite their dissatisfaction at high interest rates and such cheating (which in effect increases the interest rates further) farmers nevertheless go to commission agents for credit, it is out of helplessness.

Some observations

It is possible that not all the respondents might have answered frankly about their indebtedness, since there is still a stigma attached to having large arrears, and an unwillingness to talk to official surveys about informal sector debt. But if we assume the responses to be frank, it is worth noting that long-term non-productive debt is only 12.8 per cent of the total debt. That is, while expenditure on social ceremonies, consumer durables and the like do contribute significantly to the total debt, the bulk of the debt is either for productive purposes or (in the case of mortgage debt) because of inability to service earlier debts.

The growth in debt is being fuelled principally by features arising from the Green Revolution agricultural strategy itself: rising quantities and prices of inputs and the trend toward stagnation in yields. The debt is further being fuelled by interest payments on the debt itself, as can be seen from the high level of outstandings on high-interest debt.

It is interesting that despite the much greater level of rural banking and cooperative societies in Punjab, indebtedness to commission agents is so high. This detailed survey certainly demolishes any remaining credibility to official surveys which showed falling indebtedness and falling share of the informal sector. If this is the case in Punjab, one would expect a much larger proportion of the debt to be in the informal sector elsewhere in India.

The domination of commission agents in the credit market implies that they also are able to extract, from the farmers who borrow from them, higher prices for inputs (or supply poor inputs, which amounts to the same thing) and lower prices for the output. In other words, they are able to extract an effectively higher interest rate than the stated one, which itself is high. (One interesting question is: why do the commission agents agree to carry over such large outstandings, unless they get something extra out of doing so?) This is reflected in the responses of the surveyed farmers.The actual drain via such usurious practices is thus certainly larger than the estimate given in the study, but it would be very difficult to give an accurate estimate of it.

The high level of outstandings on short-term credit indicate a growing crisis. Almost the whole outstanding amount on short-term debt is owed to commission agents, which means that the interest rate on it is also high, and so it will accumulate rapidly, and eat up a larger and larger proportion of the peasant’s income.

For such a useful survey, a number of questions are mysteriously left unasked: First, as we mentioned, the study does not mention having asked the respondents about interest rates in the informal sector.

Secondly, it mentions that about a-third of short-term credit is left outstanding at the end of the year; that means it would get added to the credit requirement of the following year. It would have been natural to ask: what proportion of the short-term credit taken in the given year (regarding which data was collected) was to meet the outstandings of the earlier year? (The same could have been used to calculate a figure for the state as a whole.) Is the proportion of outstandings rising over time, as one might imagine with such a heavy burden of debt?

The implications are quite serious: if 13.6 per cent of small farmers have already had to mortgage out some of their land, and yields are stagnating while input costs are rising, growing outstandings would point to more mortgages, and perhaps land alienation in favour of large farmers. The Punjabi press anecdotally reports a rising trend in such land alienation. The fact that commission agents are willing to carry over such a substantial proportion of the debt from one year to the next suggests that they too have a strong stake in keeping their clients indebted, although they might not be interested in taking over the land for themselves.

And yet there is evidently no growth in alternative employment for the peasants who find farming unremunerative and debt-creating. Little wonder that, trapped in debt and pinned to their land, so many of them are choosing suicide.

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