RURAL INDEBTEDNESS IN INDIA

Submitted To Submitted By

Dr. Tilak Raj Bhrigu Sharma

Loveneet Singla

MBA-HR
 What Is Rural Indebtedness?

Indebtedness means a agreement to pay money to another party. In rural India when farmers are
unable to repay loans and accumulate it give rise to rural indebtedness. Rural indebtedness is an
indicator of the weak financial infrastructure of our country, which includes inability of our
economic system to reach to the needy farmers, landless people in the villages and the
agricultural wage laborers. This problem is just not related to one individual but is passed on
from one generation to the next generation. Taking or incurring debt for the purpose of
agricultural production is indeed necessary as it contributes to production.

However, the rural people incur debts for nonproductive purposes such as to meet the family
needs, perform social functions (related to marriages, birth, and death), litigation, etc. Since
money taken does not contribute to production but instead to consumption, it drags the rural
people into indebtedness.

Thus, it becomes impossible to repay these loans. To clear these loans, the rural people incur
debts again. In this way, they are stuck in the clutches of indebtedness, which passes on from one
generation to another. For many small farmers, the agricultural production is so less that they are
not able to provide for such unproductive expenditure. The weaker financial inclusion in India
has given the local money lenders an opportunity to exploit such farmers from generations to
generations. One of the tragic manifestations of the crisis is the large number of suicides
committed by the farmers in some parts of India.

The agrarian crisis in India has both long-term structural and institutional as well as short term
manifestations. The long-term structural features are a sharp decline in the share of agriculture in
the Gross Domestic Product (GDP) accompanied by a very low rate of labour force
diversification away from agriculture. This has resulted in declining relative productivity of
agriculture vis--vis that of the non-agricultural sector. A large dependence of working
population on land has also resulted in a steep decline in per capita land availability. There has
been an increase in the marginalization of ownership and operational holdings. The increasing
pressure on land resources is accompanied by severe stress on the availability of water resources
in the country and unequal regional distribution of available water. On the credit front, the
functioning of the rural cooperative credit institutions has deteriorated in many parts of the
country. The emphasis on economic efficiency has led to the neglect of social priorities in
lending by the commercial and regional rural banks. Targeted and priority lending are under
pressure. The result is growing dependence on non-institutional sources of credit at very high
rates of interest. It is only recently that some efforts have been made to rejuvenate the credit
system in the country. Except for a few crops, the procurement mechanism does not serve the
purpose of ensuring minimum prices to agricultural producers in many parts of the country.

The crisis has been exacerbated further by rapid environmental degradation and plateauing of the
existing agricultural technology. The liberalization of the economy has failed to give a big push
to agricultural exports and to increase income and employment in agriculture. Although almost
all regions in India have experienced a deceleration in their agricultural growth, the adverse
impact is especially serious in rain fed regions and among small and marginal farmers with
limited resources.
There are many dimensions of the present agrarian crisis in India. The search for a solution
therefore needs to be comprehensive by taking into consideration all the factors that contribute to
the crisis.
 ESTIMATES OF IDEBTEDNESS

The RBI carried out three decennial surveys on rural debt in 1951, 1961 and 1971. The National Sample
Survey Organization conducted the All India Debt and Investment Surveys for the years 1981-82 and
1991-92. The first and the second decennial All India Rural Debt and Investment Survey conducted by
RBI at tempted at valid and reliable estimates of debt; investment and other related characteristics of rural
households for the country as a whole and for major individual states.

Table: 1 Average Debt of Rural Households (In Rupees)

YEAR CULTIVATORS NON CULTI VATORS ALL

1971 605 223 500
1981 803 205 661
1991 2294 1151 1906

Source: - R.B.I. Bulletin, may, 1999.

Table: 2 Flow of Institutional Credit to Agriculture

YEAR COOPERATIVES SCHEDULED REGIONAL TOTAL CREDIT

COMMERCIAL RURAL TO
BANKS BANK AGRICULTURE
1970-71 100.0 % - - 744
1980-81 61.6 % 38.4 % - 3292
1990-91 49.0 % 47.6 % 3.4 % 9830
2000-01 39.4 % 52.6 % 8.0 % 52827
2001-02 38.0 % 54.1 % 7.9 % 62045
2002-03 34.1 % 57.2 % 8.7 % 69560
2003-04 31.0 % 60.3 % 8.7% 86981
2004-05 25.0 % 65.0 % 10.0 % 1,25,309
2005-06 21.8% 69.7 % 8.5 % 1,80,456

Causes of Indebtedness

The main causes of the indebtedness of the farmers are his poverty. The farmer has to borrow for
various purposes, as he has no past saving of his own. Sometimes, the crops fail because of the
failure of monsoons, or because of floods etc. when he has to make some improvement on his
land as bounding, construction of wells, etc. or when he has to buy costly implements, he is
forced to borrow. Just as poverty forces him to borrow, it is his poverty again which forces him
to have so little for paying off his debt. Secondly, the farmers are to incur certain types of
expenditure which automatically lad them to borrowing and indebtedness. For instance, they
respect social customs very much and, therefore they have to celebrate marriage, religious
festivals, etc. Births and deaths are also sources of unnecessary and unproductive expenditure.
Again, Indian farmers are given to litigation, which is highly expensive in India. Thirdly, some
of the debt may be inherited. A person inherits his farmer's property; likewise he inherits his
father's debt too. In many cases bonded laborers continue to be so, often for generation. Finally,
the money-lenders themselves are responsible to a large extent for rural indebtedness. They are
more interested in forcing the borrowers to part with their land consequently; they encourage the
farmers to borrow from them, charge with high rate of interest.
Poverty:
Poverty is perhaps a major cause for rural indebtedness. The low level of rural incomes, the
uncertain and primitive farming of small landholdings makes it impossible to meet the needs
required for their living. Often, the rural people take debts to meet these needs.

Ancestral/Inherited Debt:
Most of the rural debts of the present day are inherited from the past and which increases with
the passage of time. An inheritor is liable to the repayment of the debt only to the extent of the
property inherited by him.

Despite this law, the rural people continue to repay the debts of their forefathers, as they are not
fully conversant with law as they are illiterate. As these people are bound by the traditions and
values they regard it as their sacred social duty to repay the debts of their forefathers.

Such increasing debt is passed on from one generation to another making its repayment
increasingly difficult, whenever it is passed on. Thus, the Royal Commission has rightly stated
that the Indian farmer is born in debt, lives in debt and dies in debt.

Social and Religious Needs:

Villagers are mostly bound by the social traditions and customs, which are considered to be
sacred and had to be performed. Some of these ceremonies are marriage, births, deaths, religious
occasions, etc. The expenditure is usually very high for the performance of these ceremonies. In
order to meet these needs, the villagers take loans. As their incomes are not sufficient enough,
they are not able to repay these loans. Thus, they remain unpaid and increase with the passage of
time.

Litigation:
Generally, the agriculturists in India are involved in various kinds of disputes related to land,
property, etc., which force them to go to a court of law. Often, they view it important to win the
case as it is related to the family prestige and honor. Such litigations involve heavy expenditure
and time. In order to meet these needs, the agriculturists take loans that they are not able to repay
and are caught into indebtedness.
Backwardness of Agriculture:
Indian agriculture is an uncertain business. It virtually depends on unreliable rains for the supply
of water. If there are no rains or untimely rains, the entire crop is lost and the credit invested in
the agriculture goes waste. As a result, the loan taken for the productive purposes also becomes a
burden, leading to indebtedness of the farmers.

Excessive Burden of Land Revenue and Rent:

Land revenue, where it is levied by the government in some states and the rent payable to the
landowners is becoming excessive burden on small farmers. In order to pay these land revenue,
mid-rent, the farmers take loan. Sometimes, the farmers have to pay these rents and land
revenues even during the floods and drought. This make the farmers run into debts.

Defective Money Lending System:

The village money lending system is very much defective. The sole aim of the moneylenders is
to extract the maximum from the farmers. The moneylenders make wrong entries in their
account books, charge very high interest rates and extract high prices for the goods they sell to
the farmers but purchase the farmers produce at very low prices.

In course of time, as the amount debt increases, the moneylenders are much interested in seizing
the farmers lands, and other valuable assets than the debt being repaid by the farmers. Thus, the
farmers are trapped in the hands of the moneylenders.

SOME OTHER CAUSES ARE LISTED BELOW:

High costs of agricultural products.

Uncertain monsoons.
Exploitation by moneylenders.
Faulty money lending system.
Lack of education.
 Poor financial inclusion.
Weaker marketing system of banking services.
 Consequences of Rural Indebtedness

There are harmful economic, social and political consequences of heavy rural indebtedness,
affective adversely the interest of country. The consequences of mounting indebtedness on
farmers are very serious indeed. It is this indebtedness that is responsible for low standard of
living and worsening poverty amongst in cultivating classes. As started earlier, due to heavy
debts, the farmers are unable to properly market their product. The farmers are compelled to sell
their produce in an isolated market for the advantage of the traders. As a result of debts, the
income of the farmers is mostly spent for repayment and agricultural improvements tend to get
neglected. There is thus, little scope for the farmers to improve their economic status. In
countries like Japan, even the small farms are managed most efficiently by adopting the latest
farm practices. The small farms need not be inefficient and they need not suffer from low
productivity. In India, small farms also became unviable as they dont have access to crucial
inputs like credit and irrigation. If the small and marginal farmers are in debt, they will not be in
a position to adopt modern farming practices. This would cripple their capacity to increase their
income levels. This would also mean that they cannot repay the loans taken. Mostly the small
farmer loses both ways gets a low price while selling his produce, but has to pay high prices
while buying inputs. Rural indebtedness is, therefore, the causes as well as the effect of the
growing poverty of the Indian farmers. Rural indebtedness creates a class of landless laborers
and tenants in the place of independent farmers. In some cases, where the landless laborer does
not have anything worthwhile to pledge to landlords and money-lenders, they are forced to
pledge their own person and become bonded slaves to the landlords and money-lenders. In many
parts of the country, the small peasants, who have lost their land to the money-lenders and the
large landlords, have risen against the latter in a violent manner. The problem is particularly
serious in parts of Bihar, Orissa and Andhra-Pradesh where the high caste money-lenders have
fraudulently deprived the simple and illiterate of their meager land ownership. This has been
direct causes of Naxalite movements in these areas. The political consequences too are serious
and harmful. The farmers under debt are related as mere .Votes or commodities which the
moneylenders use as their private property. For these farmers freedom of vote is a mirage. In fact
their political status is- nothing but a reflection of their low economic position. It is clear from
the above that rural indebtedness is an evil from every angle.

Economic Consequences:

As the farmer is deprived of the substantial part of his produce in clearing the debts, payment of
interests and principal amounts, he loses interest in agricultural production. This leads to low
agricultural production and income.

The farmer is forced to sell all his produce to the moneylender and he is deprived of selling his
produce in the open market and obtaining the prices of the market. Such a situation adversely
affects the inducement for work and agricultural production of the farmer.

The trade between the moneylender and the farmer is always beneficial to the moneylender. The
farmer is priced heavily for what he purchases and receives little for what he sells to the
moneylender. Thus, such trade leads to loss of a substantial part of his income.

In the process of obtaining loans, payment of interest and repayment of principal to the
moneylender, the farmer often loses his land, as he is not able to repay the loan. As a result, the
farmer, the owner of the land, becomes a landless laborer.

Social Consequences:
The relations between the moneylenders and the farmers become venomous and poisoned the
social life. Therefore, the social groups get divided into two classesthe exploiting class and the
exploited class. Due to the loss of land, the farmer feels deprived and pushed down in the social
hierarchy. Land ownership gets concentrated in few hands, which builds up tensions between the
moneylenders and farmers.
As the farmers lose their lands, they have to render services to the farmer. Their self- respect is
lost as they become slaves. Though there are many laws to protect them, they are difficult to
enforce where the farmers are illiterate or do not have enough resources to go to the courts.

Political Consequences:

The indebted farmers are treated by the moneylenders as mere commodities of votes. The
moneylenders use these farmers as their private property. As their economic position is not
sound, they do not have a political status of their own.

Their political participation is completely dominated by the moneylenders who use them for their
own political advantages. To free themselves from the clutches of the moneylenders, farmers
indulge in illegal means to repay loans.

The moneylenders in their attempts to drag and squeeze the farmers indulge into all kinds of
illegal practices and poison the political atmosphere of the villages. Thus, the rural indebtedness
adversely affects all the aspects of rural life. It hampers the agricultural production and rural
economy, reduces the farmer to a landless laborer and poisons the social and economic life of the
rural people.
 Measures for the Removal of Indebtedness

The problem of indebtedness can be solved by two means. The first is to take up measure to
reduce the burden of present indebtedness and the second is to prevent the evil from rising again
in the future.

To reduce the present burden of indebtedness, the following measures have to be

taken:
1. Canceling all the debts paid to the moneylenders by the farmers, which are more than the
principal amount itself, debts which are already been repaid but still stand in the account books
of the moneylenders, debts that are created by the moneylenders by fraud, loans for which
repayments have been received in the form of money, produce and other services like labor from
the indebted farmers.

2. Debts should be properly scaled down. According to law, the inheritors are liable to pay the
debts only to the extent they have inherited. In this way, most of the debts will be reduced. Debts
that are so excessive and standing are since a long time, should be settled between the concerned
parties or through the village panchayats. Debts, which do not have records or exist with
incomplete records, should also be reduced.

3. Apart from the above two steps, the remaining part of the debts should be handled by special
institutions such as banks. Such banks pay the amount to the moneylenders on one hand and
recover the same from the debtors on easy terms. These banks also collect funds and provide
credit facilities to their members.

To control the problem of indebtedness in future, the following steps are

recommended:
1. The income of the farmers should increase so that they could meet the unproductive expenses
and are not forced to take any loan. In order to achieve this goal, it is necessary that agriculture
should be conducted on scientific basis not depending totally on the natural climatic factors.
Some other measures have also been undertaken such as the introduction of land reforms
providing market for the agricultural produce, etc.

2. The panchayats and such other village level institutions should try to solve the village disputes
and try to prevent them from going to the courts of law, which need heavy expenditure.

3. Information regarding the laws and their implementation should be given to the villagers so
that they do not get into the clutches of the moneylenders for generations.

4. Adequate credit facilities on reasonable terms should be arranged to the farmers. Co-operative
credit is a good solution in this regard. Private lending should be eliminated in this field.

The above-mentioned two types of measures should be carried on simultaneously. Mere

prevention without any preventive measures for future would not help the situation; moreover,
there is every possibility of this evil to rise again and again. Thus, both these measures should go
hand in hand so that the problem of rural indebtedness vanishes completely.
 Remedies to the problem of Rural Indebtedness

The problem of rural indebtedness has two aspects and, therefore, the solutions are also two fold. In the
first instance, measures may be devised for cancelling old debts. Secondly, measures should be devised to
see that fresh borrowing is limited to the minimum necessary and to the productive type. At the same time
it is necessary to control the money-lender and regulate his activities.

a) Settlement of old debt

Most State Govt. and Union Territories have enacted appropriate legislation to scale down
the debts of small farmers and to discharge non/institutional debt of weaker sections like
landless laborers and rural artisans. In most States, legislation exists for compulsory
reduction of ancestral debt and in few cases, even for the liquidation. The difficulty with such
legislation is that the farmers and the landless laborers may not take-advantage, either
because they are ignorant of such legislation or because they are afraid of the money-lender.
b) Reduce dependence on money-lender-
In order to reduce the dependence of the rural people on local money-lenders, the network of
institutional credit structure, comprising cooperatives, commercial banks and RRBs, is
being rapidly expanded throughout the country to provide timely and adequate credit
support to the small farmers and artisans.
c) Control of new loans-
It is not sufficient to help in the settlement of old debts. It is necessary to see that the
farmers resort to borrowing only for the most essential and productive purposes.
Non- productive loans should be avoided. Social and religions functions from an
important part of the life of our villages. The expenditure in connection with them
cannot be eliminated so easily by advising farmers. Actually some institutional
finance should be arranged for this purpose.
 Some Remedial Measures to control the problem:

1. Debt waiver by state governments. At time to time state governments and central government have
announced debt waivers on peasants.
2. Farm Loan Waiver Scheme 2008: Government of India in 2008 released Rs 10,000 crore to banks and
financial institutions as part of compensation for writing off loans under the farm-debt waiver scheme
throughout the country.
3. Agricultural and rural Debt relief Scheme 1990-91 by central government.
4. Development of network of institutional credit network in rural area comprising cooperative societies,
Regional rural banks, Commercial banks etc.
5. Control on Moneylenders.
6. Comprehensive Crop Insurance Scheme 1985
7. Kisan Credit cards Scheme 1998
8. National Agricultural Insurance Scheme 2000
9. Farm Income Insurance Scheme 2004
10. National farmers Commission 2004
11. Small farmers Development Agency
12. Various Rural Employment Scheme like NREGA for economic upliftment of the rural poor and landless
labourers.
13. Farmers Debt relief Commissions (State level)
14. Micro Finance Schemes-SHG Bank Linkage Programs Etc.
 SUMMING UP

Since late 1990s, all regions in India have experienced a deceleration in their agricultural
growth. But, the adverse impact of the slowdown is especially serious in the rain fed
regions of India. Although all sections of peasantry have been adversely affected by the
deceleration in agricultural growth rates, it is the small and marginal farmers with limited
resources who have been hit the hardest. One more factor that has exacerbated the
situation is the drive towards diversification in the rain fed areas in the western and
southern regions of India. Diversification to high value commercial crops has no doubt
brought prospects of a big increase in yields and income of farmers, but along with it
come high volatility and risks. Diversification has also necessitated borrowing of large
amounts of money, increasingly from non-institutional sources at exorbitant rates of
interest. Since rain fed areas are prone to frequent failure of rainfall and to droughts
leading to large fluctuations in output, many farmers are driven to distress and
desperation in case of crop failure. Comprehensive short and long term measures are
required to address the numerous problems associated with Indias agrarian crisis. In the
short run, concrete measures have to be undertaken to make available timely and
adequate institutional credit at reasonable rates of interest for undertaking productive
expenditure including basic consumption needs in the lean period, and to reduce the debt
burden of vulnerable sections of peasantry. A suitable system of agricultural insurance to
face growing risks, and relief and rehabilitation through well conceived programmers to
meet the felt needs of farm households in diverse agro-economic conditions has to be
designed and executed, besides remunerative price and market support. In the long-run,
rejuvenation of the Indian agriculture lies in addressing basic structural, institutional and
technological factors as much as restructuring public support systems in the face of
growing exposure to local and global market forces. In the context of rapid
marginalization of agricultural holdings, the focus of strategy for revival of agriculture
should be on the small-farmer economy. Land reforms, particularly tenancy reforms, with
a view to reducing landlessness and to strengthening small cultivators are still relevant. A
time has come to encourage formation and institutionalization of farmers groups to
enable small and marginal farmers to overcome their disabilities in accessing assured
credit, appropriate technology, favorable market prices and insurance against growing
risks. Small and marginal farmers have to be organized in the form of collectives and
self-help groups in order to respond effectively to the current agrarian crisis.
Strengthening of these institutions, along with the conventional cooperatives, is essential
for improving the institutional credit flow as well as better accessing of appropriate
technology, extension services and improved marketing capability. There is a need to
restructure subsidies towards facilities that are needed more by small and marginal
farmers. The declining trend in public investment should be reversed, and public
investment in research and development with adequate priority to rain fed agriculture
should receive due priority. Public institutions like seed corporations should assume
greater role in making available critical inputs like seeds and extension services. Finally,
there is no way that small and marginal farmer households can improve their living
standards by depending solely on agricultural income. There is a need for diversification
into off-farm and non-farm activities, which should increasingly account for their
household income. Rural farm non-farm linkages still remain at a very low level, and
require appropriate policy support to gain momentum.

References

1. Indian Economy: Umea Kapila

2. Agricultural Taxation in Developing Economy: Varkey K. Titus.
3. Restructuring Credit System for Rural Development (State Bank of India Review, April 1996)
4. Rural Development: Dr. I. Satya Sundaram:
5. R.B.I, Report on Trend & Progress of Banking, 2001-02
6. Reserve Bank of India, Report on Currency and finance, 2002-03. Economic Survey 2003-04.