NEO-LIBERAL ECONOMIC POLICY AND PEASANT CLASSES:
The Question of Farm Profitability and Indebtedness in Indian Agriculture
ARINDAM BANERJEE
Centre for Economic Studies and Planning
Jawaharlal Nehru University, New Delhi
Draft presentation for IDEAS Workshop, Beijing,June,2007.
Not to be quoted.
(I am thankful to Prof. Utsa Patnaik for her insightful comments.)
Indian Agriculture under a Deflationary Regime:
New situation for the farmers
 Volatility of the world and domestic prices.
 Steep increase in input prices under the neo-liberal
regime.
 Continuous decline in the access to institutional
credit in rural areas over this period.
value in Rs
Trends in fertilizer prices
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
1981
1991
2003
year
Urea
DAP
17:17:17 NPK
10:26:26 NPK
Comparison of Fertilizer Prices under controlled
and decontrolled regimes
17:17:17 10:26:26
Year
Urea
DAP
NPK
NPK
Percentage increase during controlled regime
1981-91 17.5*
30
30
30.2
Percentage increase during decontrolled regime
1991-2003 75*
99.8
139.6
117.7
*: decontrolled regime started in 1992
Source: Calculation based on data from Fertilizer Association of India (FAI).
Trends in percentage share of rural credits and
deposits of SCBs in India
Year
1981
1991
2000
2001
2002
2003
2004
2005
Credit
11.9
14.7
10.6
10.1
10.2
10.2
9.7
9.5
Deposit Credit-deposit ratio
13.4
60.6
15.1
59.4
14.7
40.0
14.7
39.0
14.2
41.8
13.8
43.7
12.9
43.6
12.2
51.6
Sources: Ramachandran and Swaminathan (2002) for the figures pertaining to 1981, 1991 and 2000 and Banking
Statistics: Basic Statistical Returns, RBI for 2001-2005.
Objectives of the study
The study has two objectives Trace the economic behaviour of peasant classes in the
labour and land-lease markets under the current policy
regime.
 An assessment of the debt situation of the peasantry and
identify the classes affected by debt-driven vulnerability.
Methodology
 The study is based on a primary survey of 248 rural
households in West Bengal and Andhra Pradesh.
 A two-tier selection process was adopted to identify an
economically advanced region (AR) and backward region
(BR) in each of the states.
 A stratified random sample survey has been conducted in
four villages in Bardhaman district, West Bengal and five
villages in Anantapur and Karimnagar districts, Andhra
Pradesh.
Peasant Classification
 Classification of households into economic classes
has been done on the basis of Patnaik’s Labour
Exploitation Index (E)
E = X/F = [(Hi – Ho) + (Lo – Li)]/F
where Hi, Ho are labour days hired in and out respectively, Lo, Li are the total
labour days on land leased out and land leased in respectively and F is the family
labour in self-employment.
 The size-class classification of households using
operated area has also been employed in the
framework of analysis.
Details of Economic Classification
Economic Class Value of E
Comments
Rural labour
E=-∞
X < 0 and |X| is very large, F = 0.
Poor Peasant
E≤-1
X < 0, F > 0, |X| is large and |X| ≥ F.
Small Peasant
0≥E>-1
X ≤ 0, F > 0 and |X| < F.
Middle Peasant
1>E>0
X > 0, F > 0 and X < F.
Rich Peasant
E≥1
X > 0, F > 0, X is large and X ≥ F.
Landlord
E=∞
X > 0 and X is very large, F = 0.
Source: Adopted from Patnaik (1976)
Peasant class interaction in the labour and landlease markets in the four regions of study
West Bengal: Advanced Region
 In the AR, West Bengal, a significant feature is the small size of land
holdings. The marginal and small farmers constitute a high 77.9 % of the
households.
 The poor peasants are hiring out slightly more labour-days than the rural
labour. This class, however has access to small plots of land due to the land
reforms that this region in West Bengal experienced.
 The rich peasant class forms the largest economic class at around 39 % and
is spread across all the size-classes. This implies that a demand for hired
labour in cultivation is generated from all size-classes in this region.
Andhra Pradesh: Advanced region
 The middle and small peasant class together comprise more than 60 % of
the households.
 The leasing in of land from others for cultivation is significant in this
region.
 Only the highest two size-classes are hiring in labour in the net. This is
due to the concentration of rich peasants and landlords in the two highest
size-classes.
West Bengal: Backward Region
 The agriculture here is of a subsistence nature and hence interactions in
input, output and credit markets are significantly lower compared to the
other regions.
 This is a predominantly labour hiring out region due to the low
absorption of labour in its near subsistence level agricultural activities.
 The hiring out of labour in non-agricultural activities is equally
important as the selling of labour in the agricultural labour market.
Andhra Pradesh: Backward Region
 The poor peasant and small peasant classes together comprise close to
60% of the households i.e. a majority of the households are net-sellers of
labour power.
 The poor peasants resort to large hiring out of labour in a typical rural
proletarian fashion but are spread across all size-classes.
 This phenomenon where cultivators are exploited indirectly through rent
payments in the land-lease market is present in this region also.
Indebtedness among Peasant Classes and the
underlying factors
 The BR, West Bengal is not included in this analysis as the
credit market interaction of the peasantry is negligible.
 The outstanding debt per household is much higher in both
the regions in Andhra Pradesh compared to the AR, West
Bengal. The outstanding debt per household is Rs. 60699
and Rs. 67546 in the AR and BR respectively in Andhra
Pradesh while the same is Rs. 30873 in the AR, West
Bengal.
Inter-regional comparison of household
indebtedness
 An inter-regional comparison of the Debt-Assets ratio and the InterestGVO ratio gives a stronger illustration of the disparity in the debt
situation between the regions.
 Debt-assets ratio:
AP – AR: 0.66
AP – BR: 0.38
 The Interest-GVO ratio:
AP – AR: 0.240
AP – BR: 0.227
WB – AR: 0.22.
WB – AR: 0.074.
Inter-class analysis of household indebtedness for
the three regions
In the AR, West Bengal,
 The small peasant class has a high interest-GVO ratio of 0.297.
 The marginal farmers (0.01 to 1.0 acres), the majority group in the
region, have a high interest-GVO ratio of 0.213.
In the AR, Andhra Pradesh,
 The interest-GVO ratio is high for the poor, middle and rich
peasants. The debts as a percentage of assets exceeded 60 percent for
these three classes.
 The marginal and small cultivators are also in an extreme debt
situation with incredibly high interest-GVO ratios of 0.853 and 0.460
respectively.
Continued,
In the BR, Andhra Pradesh,
 The poor peasant class, which is the largest class in this region, has
remarkably high debt-assets ratio and interest-GVO ratio at 0.87
and 0.575 respectively. The rich peasants and the middle peasants
also have moderately high indicators of indebtedness.
 The interest-GVO ratio is high for not only the marginal an small
cultivators but also for those with large operated area (more than 10
acres).
Marginal: 48.45
Small: 0.90
Large: 0.242
Number of loans and average interest rate region wise
West Bengal
AR
Andhra
Pradesh AR
Andhra
Pradesh BR
No. of loans, of
which
92
71
104
Institutional
75
27
78
Non-institutional
17
44
26
Average interest
rate
14.64
19.73
13.82
 A calculation of the average interest rate points out the disparity between
the credit market structure and the cost of credit between the three
regions.
Comparison of the Interest component in Outstanding Debt
with the average Interest rate
 A comparison of the share of interests in the outstanding debt with the
average interest rate reveals the rates of failure on part of the households
to clear their interest commitments yearly.
 This share exceeds the average interest rate by 7.75 percentage points
and 8.47 percentage points for the AR and BR respectively in Andhra
Pradesh indicating a drastic build up of household interest costs over a
time-period (Table 9).
 In the AR, West Bengal, this share is 16.18 percent and marginally
higher than the average interest rate.
Intra-class Comparison of the Interest component in
Outstanding Debt with the average Interest rate
AR,West Bengal:
 The poor peasant class has an interest share of 23 % which is higher than
the average interest rate.
AR, Andhra Pradesh:
 The interest share in outstanding debt for the poor peasants and rich
peasants is at around 25% and 41% respectively
BR, Andhra Pradesh:
 The interest component of debt exceeds the average interest rate for all
classes except the small peasants.
Comparison of the annual outstanding interest
payments and yearly Farm Labour Income
 A comparison of the outstanding interest per household and the Farm
Labour Income (FLI) per household for the reference year of the survey
identifies the vulnerability of the peasant classes in the credit market
(Table 10).
The debt situation
 In BR, Andhra Pradesh, the yearly interest commitment exceeds the FLI
by around 63 percent.
 In AR, Andhra Pradesh, the annual interest obligations of the households
are 74 percent of their FLI.
 In the AR, West Bengal, this figure is lower at around 35 percent.
Intra-class Comparison of the annual outstanding
interest payments and yearly FLI
 The small peasants in the AR, West Bengal as well as the marginal and small
cultivators in the AR, Andhra Pradesh are making losses and have a negative FLI
for the reference year.
In WB – AR,
 The annual interest cost is greater than the annual income for the poor peasants
and marginal cultivators.
In AP – AR,
 The interest costs for small and middle peasants are higher than their annual
farm incomes. For the poor and rich peasants also, the yearly interest costs add
up to around 75 percent of the annual FLI.
In AP – BR,
 The interest obligations for the poor and middle peasants are 4 to 5 times their
FLI. The landlords have their FLI exceeded by their interest costs.The interest
liability of rich peasants amount to more than 85 percent of the FLI.
The processes and causes behind the three different
situations:
AR – AP
 The share of total debt owed to institutional sources in the AR, Andhra
Pradesh is only 23.63 percent (Table 11).
 An early crisis post-liberalization in this cotton-growing region has led
to this situation where the banks stopped giving credit to farmers from
1998.
 A lower interest rate structure due to more access to formal credit can
reduce the yearly liability of interest costs on the annual income of the
households.
BR – AP
 The vulnerability of peasant classes is fundamentally due to plummeting
farm incomes and is spread across classes irrespective of whether they
have access to institutional credit or not.
 The deflationary economic regime led to a consequent dwindling of the
domestic demand for groundnut, which pushed down the prices of
groundnuts.
 The simultaneous crop failures, high cost structures and paltry returns to
private investments in irrigation are factors which together has piled up
debts for the households.
AR - WB
 This is a primarily rice and potato cultivating region.
 The vulnerability of the poorer classes is due to the moderate volatility in
potato prices and the rising input costs including that of irrigation.
 A well-functioning Primary Agricultural Cooperative Society (PACS)
shields the households from debt-driven vulnerability. Also ensures high
access to formal credit even for the vulnerable classes and makes them
less susceptible to the predatory nature of private credit.
Policy Measures to tackle the problem of
Indebtedness
 Immediate debt-relief measures.
 Enhancing access to institutional credit in the rural
areas.
 Arrest the upward spiral of input prices, especially for
the essential farm inputs.
 Provision of proper extension services and training to the
farmers, especially for commercial cultivation.
Thank You