It has been the The Acorn’s case that [the farmer suicide] crisis is caused by the government’s determined refusal to allow market forces to play in the agriculture sector. Its policies have created perverse incentives: leading to a scarcity in formal sources of credit that is the primary financial cause of farmer suicides.Such a position is not surprising for a blogger who writes at The Indian Economy Blog. "The solution to India’s ‘agrarian crisis’, therefore," Pai continues, "lies not in government largesse, but in its retreat. It lies in making rural and agricultural markets work."
"Markets, markets, markets, let the markets do their thing," seems to be the refrain of free market believers like Pai. As a sociologist, I cringe at the notion of reducing social complexity to the abstract, and reified (the process by which our own socially constructed concepts become a part of our reality), notion of "market forces." On the other hand, I'll admit, the solution suggested in the end seems to make some sense:
Politicians, intellectuals and farmers all need to accept that small loans are more expensive and must be priced accordingly. Thus an answer to the credit needs of small farmers in India is to free up interest rates, not just in terms of regulation but in terms of acceptability. At the same time, the government should permit a whole spectrum of credit providers, formal and informal, to enter the field and compete with each other so that they can enhance the total credit flow and eventually bring down costs. No regulation can control supply and price simultaneously. So if more credit has to flow to farmers, the price (interest rate) must be deregulated. Initially it may go up, attract more players and then they will compete and bring down the rates. Ironically, this lesson from the housing and consumer finance market has been missed by our policy-makers. (Pai is quoting from here).Sure, I can agree that there are some problems with the loan market. I just wish that the economists would take a step back and ask "Why are farmers in India borrowing money?" I need to do more research before I settle on the answers to this question. But my suspicions are that (a) the Green Revolution was the initial impetus behind more capital-intensive agriculture, and that (b) the Biotech Revolution has wratcheted up to yet another level the capital needed to farm in India today.
So let's not scoff at the "terrible and perverse incentive" created when Manmohan Singh promises money to help the widows of farmers who have committed suicide. They are simply the latest victims of at least 50 years of decision-making that has had unintended consequences. Economists have a nice short-term solution in the goal of fixing the markets so that loans are not so burdensome for farmers who are subject to uncontrollable forces like the weather. But in the long run, making agriculture increasingly capital intensive, as I believe the Green and Biotech Revolutions have, makes agriculture profitable only for large agribusinesses that can afford the overhead and absorb the losses when weather, insects, or other forces destroy their crops.
Two long-term solutions come to mind: (1) use microfinance mechanisms to wean farmers from the expensive inputs required for "conventional" agriculture and to transition them back to organic farming; (2) create "work transition" programs that can slowly move farmers into new types of work as their land is taken over by large agribusinesses (which do not create jobs).
Again, these are preliminary thoughts. I welcome all types of feedback. I am continuing to try to understand this issue and will write more on it in the coming weeks.
Technorati tags: India economy, farmer suicides, agriculture