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Vol. 1, Issue . 1 / February 2011, pp.


Research Paper - Economics

Rural Indebtedness : Causes and Consequences

- Dr. Y. D. Pujari Dept. of Economics D. B. F. Dayanand College of Arts & Science, Solapur.

The Indian Farmer borrows year after year but he is not in a position to clear off the loans, either because the loans are larger or because his agricultural output is not large enough to pay off his debt. Therefore, the debt of the farmer goes on increasing and this is what is known as rural indebtedness. there is a well known saying in the country "The Indian Farmer is born in debt, lives in debt and dies in debt." Incurring debt for agricultural production is not bad. In fact it is a necessary element of the proper conduct of agricultural operations. Even in advanced countries, agriculturists take loan to carry on their work. Such a debt can be repaid out of the income generated from production. But India's agriculturists undergo debts also for nonproductive purposes. They contract loans to meet such consumption needs as family expenditure on consumption performance of social functions connected with marriage, birth and death, litigation etc. Since these loans contribute nothing to production, it becomes impossible to provide their payment. As a result, such debts go on increasing

from generation to generation. Agricultural production in the case of many farmers is so small that they are not able to provide for such productive expenditure. Being backward, agriculture in India for most cultivators is a deficit economiy, i.e. their expenditure exceeds their income. During such circumstances they find no escape from the burden of unproductive debts. A serious aspect of this problem is that it is by and large a problem of small farmers. These farmers are people of small means. They cultivate tiny pieces of land. Their production is small. The surplus with them, if any, is still

smaller. But their needs of credit for agricultural operations and household needs are comparatively greater. To meet their requirements they take loans mostly from moneylenders for high rate of interest which then are not able to return. As a result the dead weight of debt sits heavily on their heads. Estimates of Indebtedness The RBI carried out three decennial surveys on rural debt in 1951, 1961 and 1971. The National Sample Survey Organisation conducted

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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 releted 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 1971 1981 1991 Cultivators 605 803 2294 Non-cultivators 223 205 1151 All 500 661 1906

Causes of Rural Indebtedness. The main causes of the indebtedness of the farmers is his poverty. The farmer has to borrow for various purposes, as he has no past saving of his own. Some times, the crops fail because of the failure of mansoons, or because of floods etc. when he has to make some improvement on his land as bunding, 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 foces him to have so little for paying off his debt. Secondly, the farmers are to incure 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,

Source:- R.B.I. Bulletin, may, 1999. Table: 2 Flow of Institutional Credit to Agriculture
Year Cooperatives Scheduled Commercial Banks 38.4 % 47.6 % 52.6 % 54.1 % 57.2 % 60.3 % 65.0 % 69.7 % Regional Rural Banks 3.4 % 8.0 % 7.9 % 8.7 % 8.7% 10.0 % 8.5 % Total credit to Agriculture (Rs. Crore) 744 3292 9830 52827 62045 69560

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 labourers continue to be so, often for generation. Finally, the money-lenders themselves are responsible to a large extent for rural endebtedness.

1970-71 1980-81 1990-91 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

100.0 % 61.6 % 49.0 % 39.4 % 38.0 % 34.1 % 31.0 % 25.0 % 21.8%

86981 1,25,309 1,80,456

They are more interested in forcing the borrowers to part with their land consequently, they encourage the farmers to borrow from them, charge

Source: Govt. of India, Economic Survey, 2003 04& 2006-07

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very high rate of interest, keep false accounts and finally, when the farmer's debt has accumulated to a sufficient amount, they take away the land of the borrowers. Village moneylending is thus like a cobweb. Once a farmer is entrapped in it, he is unable to get out of it during his life time. 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 donot 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 farmers. Rural indebtedness creates a class of landless labourers and tenants in the place of independent farmers. In some cases, where the landless labourer do 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, Orrisa and Andhra-pradesh where the high caste money-lenders have fraudulently deprived the simple and illiterate adivasis of their meagre 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 releted as mere .Votes or commodities which the moneylenders use as their private property. For these poverty of the Indian

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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. Remedies to the problem of Rural Indebtedness The problem of rural indebtedness has two aspects and, therefore, the solutions is also two fold. In the first instance, measures may be devised for concelling 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) c)

banks and RRBs, is being rapidly expanded throughout the country to provide timely and adequate credit support to the small farmers and artisans. 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 toborrowing only for the most essential and productive purposes. Non- productive loans should be avoided. Social and religions functions from an important part of te 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. Reference:
1. 2.

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 labourers 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 labourers may not take-advantage, either because they are ignorant of such legislation or because they are afraid of the money-lender.
b) 5. 4. 3.

Indian Economy:

Uma Kapila

Agricultural Taxation in Developing Economy :Varkey K. Titus. Restructuring Credit System for Rural Development (State Bank of India Review, April 1996) Rural Development : Dr. I. Satya Sundaram: R.B.I, Report on Trend & Progress of Banking, 2001-02

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


Reserve Bank of India, Report on Currency and finance, 2002-03. Economic Survey 2003-04.

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