Mirage of Hope

(column by Kalyan Upadhyay)

As the saying goes, ‘If you can’t beat them, join them’. Prime Minister Manmohan Singh seems to have found a new mantra to tackle suicides by indebted farmers of India. On October 18, while addressing the second Agricultural Summit in New Delhi, the PM initiated a debate over the possibility of bringing the money lenders under the fold of governmental regulations when he said, “What do farmers need – a lower rate of interest or a reliable access to credit at a reasonable rate? Do we need to bring in money lenders under some form of regulation?” However, Dr. Singh seems to have ignored the fact that the recent spate of suicides by farmers in parts of southern India has got very little to do with either reliability or the rate of interest on credit lent by the private lenders.

The vicious debt trap in which a farmer finds himself today is the outcome of multiple factors rather than just one or two individual elements. In fact, the over dependence of a large section of farmers on monsoons, coupled with rising input costs and declining profit margins has turned farming into a virtual gamble, where agricultural loans are leveraged as bets. The rules of the game change drastically against the farmers when they have to seek private financial help. According to a World Bank release, “More than 87% of India’s poor cannot access credit from a formal source and have to depend on money-lenders who charge them interest rates ranging from 48% to 120%.” This goes to falsify the tall claims made by the public sector banks who measure achievements in terms of the number of branches rather than in terms of the ease of accessibility of micro-credit facilities.

Life of a rural poor may not be as miserable as once depicted by the famous Hindi writer Munshi Premchand. But it would be incorrect to assume that in the last six decades, his miseries have reduced significantly. Since independence, the country witnessed innumerable credit linked poverty eradication schemes coupled with the Utopian slogans like ‘Garibi Hatao.’ Yet, for a majority of the population, life continued to languish under the burden of unserviceable debts. The Green Revolution of the mid 70s made India self-sufficient in terms of food grains, but also led to the emergence of an affluent farming community which could rule as a monopolist in terms of securing both subsidies and Minimum Support Prices.

However, there is still a ray of hope for the poor and marginalized farmers, only if the government gears up to effectively pursue the micro-credit policy with a missionary zeal. Recently, Mohammad Yunus of Grameen Bank was bestowed with the Nobel Peace Prize for empowering millions of poor in Bangladesh through micro-credit. A similar replication of Professor Yunus’ Grameen model which today covers nearly 6.6 million Bangladeshis may help India's farmers emerge out of their recurring debt cycles. According to the 2001 census, about 742 million (72.2% of population) of Indians still dwell in villages. Of these, a majority fall in the category of poor or below poverty line. In villages, agriculture and related activities are still the major source of livelihood. And micro-credit has witnessed an unprecedented rise.

However, it has only marginally facilitated a shift in the primary occupation of rural poor from agricultural activities. The report by the Advisory Committee on flow of credit to agriculture states, “In spite of decline in its share in GDP from 44.5% in 1970- 71 to 22.2% in 2003-04, there has been no significant change in the proportion of workforce depending on agriculture. It still provides livelihood support to about two-thirds of the country’s population and is the single largest private sector occupation.” This indicates that disguised unemployment is rampant in the agricultural sector. It also goes to show the increasing burden on land.

“One of the prime reasons for the success of the Grameen model of microcredit was that it was a private sector initiative. In India, it is the government which is undertaking the micro-finance activities. Thus, being a government led policy, it comes along with both corruption and red-tapism,” says Dr. Amir Ullah Khan, Deputy Secretary General, PH.D Chambers of Commerce & Industry. Since 1992, the governments have adopted the NABARD pioneered Self Help Group (SHG) Banks linkage model in which a homogenous group of people are provided credits on a collective basis. The performance of this model so far, has been quite impressive. From 255 SHGs linked with banks in 1992-93, the number reached 14,000 in 2000.

The total credit routed through these SHGs increased from Rs.33.2 million to Rs.1.9 billion. However, there are still certain bottlenecks in the policy which need to be addressed urgently. Compared to the Grameen Bank, the Indian Banking sector that undertakes statutory micro-credit activities is under heavy regulation. The cap in the interest has been fixed at 7%. Some economists see this as a disincentive for the banks to take risks. Though Grameen Bank did not seek any collateral in return for advances made to the borrower, the reasonable rate of interest (which varied accordingly), and woman being the major recipients, served as cushions against possible defaults. The Indian model seems to completely miss these factors. As a result, benefits fail to reach the bottom half of the pyramid.

“Micro-credit is an aggregation of small transactions. As a result of this the transaction costs are high,” responds Dr. Amir Khan. “Thus, in order to meet costs as well as prevent losses due to defaults, banks oft en give loans to large farmers. This is the reason why, despite so much of money being doled out in agricultural credit, farmers continue to commit suicides,” he added. Dr. Khan recommends arguably that if banks were allowed to levy an interest rate of 50%, that would enable them to reach out to the needy and then “they would not have to seek loans from money lenders who charge 500% to 1000% in many cases.” SHGs are a loose association of individuals with minimum 6 members and are based on the principle of collective responsibility.

It is contrary to the formal micro-loans that put the burden of repayment on the single borrower. Further, it also plays a significant role in bringing the communities together under one commonly shared responsibility. However, the current regulations require that the Self Help Groups be sponsored by Non- Government Organisations (NGOs) that are three years old. Further, once sponsored, these SHGs are expected to sustain themselves for at least 6 months before they can apply for grants. In a country where the level of illiteracy is very high, absence of outside help as well as lack of proper knowledge constrains the formation of such groups. Studies have shown that the states with higher level of literacy and greater penetration of NGOs constitute the majority of borrowers.

For the last several years, successive governments searched for a victory mantra in a beaten formula. The writing-off of loans as well as compensation may be able to reduce the miseries of the few who get it. But it is definitely not going to make them vanish. Yet, with an effective and rational micro-credit policy, the government can at least take the first right step in the direction of elevating the status of the poor in rural areas. As said earlier, the depths of the debt trap can be reduced by proper monitoring of the unscrupulous micro-financing institutions, as well as by following rational economic policies, as far as lending rates of the Regional Rural Banks are concerned.

When Beggars Dig Gold

The modest initiative by Mohammad Yunus with the poor man’s bank has brought the sleepy nation to the limelight. Beginning in 1976, Mohammad Yunus’ out-of-the-box experiment with ‘Trust’ not only accrued rich dividends for those constituting the Bottom of the Pyramid in Bangladesh’s economy, but also revolutionised the concept of micro-credit. At present, Grameen Bank caters to the needs of 6.6 million poor Bangladeshis with an annual credit flow of $608 million (2005). Its emphasis on ‘trust’ (especially on women) rather than demand for ‘collateral’, made it accessible to the needy. This poor man’s bank stands at a repayment rate of 96-8%, a figure which is enough to make asset managers of several banks fume with jealousy. A new change is in the making.

(End of Kalyan Upadhyay column)

Of course it's free trade;er... Free for us that is!
The double standards followed by the US on farmer subsidies are a bane to the world

(column by Joseph Stiglitz, Professor of Economics, Columbia University)

Americans like to think that if poor countries simply open up their markets, greater prosperity will follow. Unfortunately, where agriculture is concerned, this is mere rhetoric. The US pays only lip service to free market principles, favouring Washington lobbyists and campaign contributors who demand just the opposite. Indeed, it’s America’s own agricultural subsidies that helped kill, at least for now, the so-called Doha Development Round of trade negotiations that were supposed to give poor countries new opportunities to enhance their growth. Subsidies hurt developing country’s farmers because they lead to higher output – and lower global prices. The Bush administration – supposedly committed to free markets around the world – has actually nearly doubled the level of agricultural subsidies in the US.

Cotton illustrates the problem. Without subsidies, it would not pay for Americans to produce much cotton; with them, the US is the world’s largest cotton exporter. Some 25,000 rich American cotton farmers divide $3 to $4 billion in subsidies among themselves – with most of the money going to a small fraction of recipients. The increased supply depresses cotton prices, hurting some 10 million farmers in sub-Saharan Africa alone. Seldom have so few done so much damage to so many. That damage is greater when we consider how US trade subsidies contributed to the demise of the Doha Round. Rather than offering to do away with its cotton subsidies, America offered to open up its markets to cotton imports – an essentially meaningless PR move that quickly backfired.

Owing to huge subsidies, America exports cotton and would import little even if all the formal barriers are removed. Thus, recent trade negotiations have a surreal air about them, because whatever their outcome, ultimately cotton subsidies will have to go. Brazil, frustrated with America’s intransigence, brought a case against US cotton subsidies before the WTO, which ruled as almost any economist would: Subsidies distort world trade and are thus prohibited. Faced with the WTO order, the US will try to comply with the letter of the law and avoid its spirit, making changes in the subsidy program to ensure “technical” compliance. But these attempts will almost surely fail; in the end – though it may take years – cotton subsidies will be eliminated.

Of course, the EU's subsidies are far larger, but, in contrast to the US, Europe has made some effort to reduce them, especially export subsidies. While export subsidies appear more obviously “trade distorting,” America’s cotton and other subsidies are in fact almost as bad. When subsidies lead to increased production with little increase in consumption, as is typical with agricultural commodities, higher output translates directly into higher exports, which translate directly into lower prices for producers, lower incomes for farmers and more poverty in the Third world, including those millions of cotton farmers eking out subsistence incomes in semi-arid conditions. America and other advanced countries are the real losers from the demise of the Doha Round. Had the Bush administration fulfilled its commitments, Americans taxpayers would have benefited from the elimination of huge agricultural subsidies – a real boon in this era of yawning budget deficits.

Americans would have been better off as consumers, too, with increased access to a variety of low-cost goods from poor countries. Likewise, migration pressure would have reduced, since it’s mainly the huge disparity in incomes that leads people to leave their homes and families to immigrate to US. A fair trade regime would have helped reduce that disparity. Indeed, citizens in the rich developed world all stand to benefit from a more prosperous globe – especially where there’s less poverty, with fewer people facing despair.

For we all suffer from the political instability to which such despair gives rise. But it is America that perhaps now stands to gain the most by reviving Doha talks with a more credible and generous offer. US influence in the world has suffered greatly in the last few years; the Bush administration's hypocritical use of free-market rhetoric while pursuing protectionist policies has made matters worse. America's national interests thus dictate a policy change. But there's another powerful rationale for it: Treating fairly those who are poorer and less powerful is the morally right thing to do.

(End of Joseph Stiglitz column)