Despite the several farm waiver schemes announced by the Central and State Governments over the years, rural indebtedness in India continues to increase. Here are the reasons for it. (Images used in presentation do not belong to the author, they are relevant available pictures from varied owners across digital media.)

1. Rural
Indebtedness
in India
ADRIJA DUTTA
Contact:
Email Address - dutta.adrija@yahoo.com
LinkedIn - linkedin.com/in/adrija-dutta9b2a40183
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2. Introduction
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3. What is rural
indebtedness ?
Indebtedness means an obligation to pay money to another party.
In rural India the poor farmers and wage labourers, when unable to repay a loan
it accumulates , giving rise to the problem of 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 labourers.
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4. “The Indian peasant is born in debt, lives in debt and
bequeaths the indebtedness to his successors.” - Royal
Commission on Agriculture in India, 1928
Before the first 5 year plan, almost all finances required by the rural sector
were funded informally, through moneylenders. The concept of institutional
credit was lesser known among the rural households. As a result of which
rural debt has accumulated over years. These low income earning
households have been exploited with high interest rates and pending
payments, many of which have led to grave consequences.
The reach of formal institutional credit has
been weak in the rural areas. Despite the efforts
of the Government, the provision of credit
through cooperatives and commercial banks
were to the extent of about 4 per cent of the
total outstanding debt as at end-June 1951.
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5. There are many reasons which justify the accumulation of rural
debt. Firstly, rural debt is hereditary in India. The incidence or
burden of non-institutional debt is passed on from generation to
generation, till it is fully paid.
Secondly, widespread poverty and lower standard of living and poor
affordability leads to borrowing. Social stigmas and backward
thinking, incline rural residents to procure loans for non-productive
purposes such marriages, dowry, and other celebrations. Loans for
such purposes fail to create any valuable production, thus failing to
generate further income.
Lastly, owing to the seasonal agricultural practices, bad harvest and
crop failure have also led to accumulation of loans over time.
Epidemics or virus outbreaks, like the Corona Virus Disease (COVID-
19) in recent times, shall also have a huge impact on rural
institutional borrowing.
Reasons for indebtedness @adrijadutta

6. To sum up, the most common reasons for taking loans in rural
India are -
Purchase of
house/land/
real estate
Medical
emergencies
and health
issues
For meeting
social
obligations
Agriculture
Practices
Others
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7. The Rural Population
The rural population of India has declined overtime. This decline owes to reasons such as
education, family planning awareness, modernization, migration and others. However, the rural
credit borrowing has increased over the years, empirical evidence to support which will be analysed
later in the project. A major determinant of credit seeking, is the employment status and sector of
the rural households. Rural population is employed predominantly in sectors of agriculture,
manufacturing, construction, services and other non-agricultural sectors.
Source: World Bank Data
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8. According to a study conducted by R.Chand, S. K Srivastava and J. Singh in 2017 on rural employment
pattern, it was concluded that majority of the rural population is engaged primarily in the agriculture and
allied sector. The table below shows empirical evidence to support the same.
Source: Compiled by NITI Aayog
Average monthly income and consumption expenditure per agricultural household during July 2012 -
June 2013 for major States
Value of assets for each occupational category of households: all-India
Direct Institutional Credit for Agriculture and Allied Activities
Indirect Institutional Credit for Agriculture and Allied Activities,
Incidence of indebtedness (IOI) and average debt per household (AOD) by asset value
This pattern of employment distribution across sectors has remained the same for progressing years after
2012. A majority of the rural population remains employed in the agricultural and allied sector. In reference to
the same, this project aims to study the following:
and other related data, to understand the extent of rural indebtedness in India. This study shall also predict
next 5-years requirement for direct institutional credit, using the OLS regression method. An analysis of the
Farmer's Loan Waiver Scheme, started in 1990 by the Janta Party Government, will also be presented. The
project will end with a conclusion on the current status and future debt situation of rural households in India.
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9. Analysis
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10. Source: NSSO 70th Round, Income, Expenditure, Productive Assets and
Indebtedness of Agricultural Households in India
Among these major states of
India, some deal with a huge
gap between income and
expenditure, such as West
Bengal, Uttar Pradesh and
Bihar. This implies that rural
households in these states will
be in more need of institutional
or non-institutional credit than
the others. If the pattern of
income-expenditure is closely
studied, it can be seen that
households in many states,
meet their expenditure by a
small margin, and have very less
savings for future use. The problem of insufficient savings creates a compulsory need for loans and
borrowings. Income earned helps in purchase of assets, including agricultural land in rural areas.
Rural assets owned include other items such as - building, livestock and poultry, agricultural and
non-farm business equipments and bank deposits. In most instances, credit is taken against the
value of these assets from various institutional and non-institutional sources.
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11. Source: NSSO 70th Round, Income, Expenditure, Productive Assets and
Indebtedness of Agricultural Households in India
Land and building together, in the rural areas, clearly form the predominant component of assets –
jointly holding 94% share in the total value of assets at the national level – with land having 73%
share and buildings 21% share. The share of other items of assets rarely exceed 2% whether the
occupational categories are considered separately or clubbed together. This implies that the assets
owned are fixed capital assets, and very negligible cash in hand or deposits is available to the rural
households. To maintain liquid cash flow for covering operating costs, the households need a credit
from various institutions.
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12. Any loan to agriculture and allied sector from institutional sources is called
farm credit. There are two types of farm credit - direct credit and indirect
credit.
When the borrower is directly responsible for its repayment to the lending
agency, it is direct farm credit. It includes short, medium and long term loans
given for agriculture and allied activities (dairy, fishery, piggery, poultry, bee-
keeping, etc.) directly to individual farmers.
Indirect credit refers to, funds agriculture indirectly through some
intermediary agency/institutions etc. which will be responsible for repayment.
So funds availed by fertilizer dealers, state corporations, warehouses will come
under indirect creditor to agriculture.
The Reserve Bank of India has made it mandatory for all
banks to lend at least 18 percent of total loans to agriculture.
TYPES OF FARM CREDIT
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13. @adrijadutta

14. 2000-012001-022002-032003-042004-052005-062006-072007-082008-092009-102010-112011-122012-132013-142014-152015-162016-172017-182018-19
20,00,000
15,00,000
10,00,000
5,00,000
0
Loans Outstanding
Loans Issued
Years
AmountinRs.
The above graph, as plotted from the data in the table before, shows that over the years, the institutional credit
burden has not lightened for the rural agricultural and allied sector workers. Rather the indebtedness has
increased overtime, as one generation passes on the debt burden to another, and a large repayment amount keeps
accumulating. While the principal amount remains the same, the interest burden accumulates as the rural
household is unable to repay the amount. The Government of India ensures that this extra burden of interest
payment is minimised to a suitable rate for all the workers, As per the government regulations of 2013-
14, agriculture loan interest rates for short-term loans up to Rs. 3 lakh is kept at 7%.
Source: Computed by author
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15. The Government of India has come up with a modified Interest Subvention Scheme for short term crop loans
during 2018-19 and 2019-20, under which the most important points are:
a) Government of India will provide interest subvention @ 2% p.a. to Regional Rural Banks on their own funds
involved (excluding NABARD ST(SAO) refinance) in respect of short-term crop loans provided by them to
farmers up to `3.00 lakh per farmer. The amount of interest subvention will be calculated on the crop loan
amount from the date of its disbursement/drawal up to the date of actual repayment of the crop loan by the
farmer or up to the due date of repayment of crop loan fixed by the bank whichever is earlier subject to a
maximum period of one year. This subvention will be available to Regional Rural Banks on the condition that
they make available short-term crop loan up to `3.00 lakh at ground level at 7% p.a.
b) In order to discourage distress sale by farmers, to encourage them to store their produce in
warehouses, the benefit of 2% p.a. interest subvention will be available to banks on their own funds
involved for extending credit support up to `3.00 lakh at 7% interest per annum to small and marginal farmers
having Kisan Credit Card for a period of up to six months post-harvest against negotiable warehouse receipts
for keeping their produce in warehouses accredited by Warehousing Development Regulatory Authority
(WDRA). Subvention (incentive) for prompt repayment will not be available to the farmers for loans extended
against Negotiable Warehouse Receipts (NWRs).
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16. The table shows the amount of loans issued and outstanding which are borrowed indirectly
through some intermediary agency/institutions. The farmers repay these institutions,
which in turn repay the loan to the lending banks. Failure of crop, decline in agricultural
produce, distress sale and insufficient price ceiling disallows the farmer to repay the
middleman or intermediary agency. As seen from the data table above, taken from the
Handbook of Statistics on Indian Economy, 2017, it can be concluded that the amount of
outstanding indirect institutional credit has also increased over time, with an approximate
increase of 11% from 2012-13 to 2013-14.
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17. In the 70th round NSSO conducted the All
India Debt and Investment Survey, in
which the estimator Incidence of
Indebtedness (IOI) was used to explain the
debt burden on households, with cash loan
outstanding on 30.06.12.
Incidence of Indebtedness (IOI) is defined
as number of households with any one
loan (from respective source) divided by all
households in that population segment.
IOI = Number of households with any loan
Total Number of Households in population
Incidence of indebtedness (IOI) and average debt per household (AOD)
The IOI has been studied under head of different occupational categories of rural and urban
households in this particular project. From the table we can see, that as per occupational groups
the IOI for cultivators in the rural households is at 45.94%. This justifies the statement that burden
of rural indebtedness is most harsh on the cultivators or agricultural farmers.
Source: NSSO 70th Round, Income, Expenditure, Productive Assets
and Indebtedness of Agricultural Households in India
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18. The figure below analyses the pattern of outstanding direct institutional credit and predicts
a future rise of the same in the coming years. Indebtedness is to increase at a rate calculated
by the equation y = 87405x + 45357. With a global pandemic virus outbreak, this rate is
expected to increase, as public lock down will hinder economic activity and compel rural
households to borrow from various institutional sources. As computed on excel, the R² i.e
the proportion of the variance in the dependent variable (direct institutional credit) that is
predictable from the independent variable (yearly time series) of the equation is 0.9575.
Source: Computed by author
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19. Conclusion
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20. To address the problem of increasing indebtedness the Government of India, over the years, has
announced several interest waiver and loan waiver schemes for distressed farmers. In 1990, the
Janata Party under V.P Singh first introduced the concept of loan waivers for rural farmers. A first
major waiver was announced for agricultural debt relief totalling to ₹ 10,000 crores for agricultural
borrowers .
The second major waiver was under the agricultural debt waiver and debt relief scheme (ADWD) of
2008 amounting to ₹ 52,000 crores. Unlike the 1990 scheme that aimed at providing blanket relief to
all farmers up to a certain loan amount, the 2008 scheme provided for full waiver of debt for small
and marginal farmers (that is, farmers holding up to one to two hectares of land) , while other
farmers were given a one-time settlement - rebate of 25 per cent against the payment of the balance
75 per cent.
Despite the several farm waiver schemes announced by the Central and State Governments over the
years, the indebtedness of direct institutional credit remains at ₹ 3 lakh crore as of 2018-19. This
points out the weak financial inclusion system of India, where inspite of such waiver schematic
efforts the debt burden keeps increasing overtime.
The debt waived becomes a financial Bad Debt or Debt Un-recovered in accounts of the various
lending banks and institutions, which still has deterring effects on the total debt of the economy.
However, the incidence of burden is shifted from the cultivators to the financial institutions.
Loan Waivers are limited policy instrument for rural financial inclusion. The incidence of debt burden is
shifted temporarily, and hardly are long-term solutions. Rather, stronger supply chains, education on new
farming techniques, skill development, increasing agricultural productivity, provision of better quality
seeds and speedy and deep financial inclusion are better instruments to reduce rural indebtedness.
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21. In this current situation of Corona virus outbreak, economic
activity has slowed down. Public lockdown has led to
suspension of national transportation facilities has led to
worsened scenario of economic activity. Such slowdown in
activity will take a toll on daily wage earners and seasonal
employees, such as farmers. Currently, the farmers of West
Bengal, who had a bumper crop this year, due to lack of
transportation or expensive transportation, had to resort to
.
distress sale of perishable agricultural products.
Selling products at lower rates, will earn lower
income for the farmers, which eventually will lead to
requirement for borrowing. This will further
increase the rural indebtedness .
At this time, the Government of India has to take
proactive policy measures to take care of the
financial security of such rural cultivators. Schemes
for helping with transportation, safe storage
facilities, right price sale have to implemented by
the authorities. Compensating these impoverished
farmers are of crucial importance at this pandemic
hour.
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22. HANDBOOK OF STATISTICS ON INDIAN ECONOMY 2019, RBI
HANDBOOK OF STATISTICS ON INDIAN ECONOMY 2017, RBI
WORLD BANK DATA
NATIONAL SAMPLE SURVEY OFFICE
NATIONAL INSTITUTION FOR TRANSFORMING INDIA (NITI AAYOG)
RESERVE BANK OF INDIA
Data Sources:
Direct Institutional Credit for Agriculture and Allied Activities - Total (Short-Term and Long-Term)
Indirect Institutional Credit for Agriculture and Allied Activities
Rural population (% of total population), India, 2018
All-India Debt and Investment Survey, NSS 70th Round, 2013
Income, Expenditure, Productive Assets and Indebtedness of Agricultural Households in India
Key Indicators of Debt and Investment in India
"Changing Structure of Rural Economy of India: Implications for Employment and Growth, 2017"
Ramesh Chand, S. K Srivastava and Jaspal Singh
Seminar on Agricultural Debt Waiver – Efficacy and Limitations
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