How to stop farm loan waivers and farmer suicides
Farmer suicides have brought the problems facing the farmers to the fore. Indebtedness has been highlighted as one of the dominant problems for suicides. As a corollary, governments have taken populist turn towards loan waivers. This is not the first time the farm loans have been waived. But can it be the last?
 
There are a lot of problems facing Indian agriculture. In short, Indian agriculture suffers from: i) poor productivity, ii) falling water levels, iii) expensive credit, iv) a distorted market, v) many intermediaries who increase cost but do not add much value, vi) laws that stifle private investment, vii) controlled prices, viii) poor infrastructure, and ix) inappropriate research. 
 
These are actually symptoms of farm risk management that has gone wrong. Thus, farmers do not respond to changing prices and market dynamics pro-actively. They also bear higher costs for post-harvest coordination in the value-chain, like transportation and packaging. Lack of coordination between various parts of the agricultural value-chain also increase risks for farmers. In effect, farmers need to become better risk managers. 
 
One important risk mitigation instrument is information. We need to equip farmers with diverse information - like futures prices, weather forecasts, demand estimations, pesticide usage guidance, seed knowledge, and planting knowledge. And this information has to be available to the farmer whenever he needs it. Thus, farmers can use futures prices as input at the planning stage to ensure there is no over-cultivation of some crops. At the harvest stage, farmers can use a mix of contracted sales, and spot sales to maximise realisations. But mere information is not enough.
 
Unavailability of information is only one part of the problem. The farmer also needs physical inputs to reach his remote farm. Seeds and pesticides should reach the farmer on time. They also need a reliable mechanism to take the harvest, process it and move it out of farms. Credit and insurance needs to be approved at the right time. All this requires low-cost but dependable participants across different channels coordinating seamlessly within the farm value-chain. This requires infrastructure that farmers cannot create by themselves.
 
Despite the risk mitigation, crops can still fail. The question is then – can they fail safely? The corporate world has solved this issue by two inventions: limited liability corporation to ring fence risks and bankruptcy mechanism to resolve the liabilities. Can we apply these to farmers? A limited agricultural bankruptcy mechanism could act like a safety net for farmers. However, we do not want farmers to hide personal failures within agricultural risks. Hence, we want farmers to separate personal and agricultural assets for this purpose of limiting liability.
 
The problem can therefore be solved by a systemic approach. We can fix these using an information system – a cross between a management information system (MIS) and online market place -- to assist farmers. Such a system will reduce coordination costs, improve information availability and increase scale of operation, allowing the formal economy to step in and help farmers. I call this system Smart Agriculture Management System or SAMS. It will be accessible through phone, either as an app or voice-call or SMS.
 
At the core of SAMS is data – land records, soil health information, weather information, stock availability in Food Corporation of India (FCI), futures prices of various commodities, forecasts for demand, expected supply, trends in production, costs, and area already committed. It will also have a special module for farmers where they can indicate what assets are being deployed for agriculture. 
 
The second aspect of SAMS will be processing. Using the data, SAMS can help the farmer with crop selection, scheduling of sowing, tending, harvest, and post-harvest activities. It will also give fertiliser schedule, pesticide schedule, and irrigation schedule.
 
SAMS is integrated marketplace. All participants of the agricultural value-chain can interact with each other through SAMS. Thus, agricultural colleges can recommend best strategies, seeds, and appropriate fertilisers. Banks and insurers can check past performance of land and farmers. 
 
SAMS is also an agricultural management system. It will allow farmers to design their plan for the season and then trigger value-chain participants into action. Thus, once the farmer selects his crop, information about relevant seeds, fertilisers, and pesticides will be pushed to him. Based on the farmer’s choice, these will be delivered to him just the way we get delivery from online commerce sites like Amazon or Flipkart. SAMS will have tie-ups with delivery companies with proper checks. The loan approved for the farmer will be used for purchase of high quality inputs and these will be delivered on time to the farmer.
 
SAMS will have specialist monitors such as agricultural experts along with drones and remote sensing satellite inputs to monitor farm activity. Banks and insurers will bear this cost along with other participants in supply chain. This information shall be uploaded to SAMS in real time and will help SAMS adjust the agricultural process based on data.
 
SAMS will also have standardised contract and trusted partners. With these in place, value-chain participants can create infrastructure such as cold chain, container hubs, packing and food processing. It will plug into the pan-India electronic trading portal E-National Agriculture Market (E-NAM) and other already existing infrastructure.
 
Now, if for some reason there is a crop failure, bankruptcy can be triggered for the agricultural part of the farmers’ activity. Farmers’ personal assets will remain untouched and the liabilities will be resolved according to bankruptcy procedure. The farmer will lose the capital he invested in that year’s crop and banks may lose the loan disbursed for seed. Insurance can pick up the tab for these losses so long as they conform to SAMS.
 
If we design it well, SAMS can ring-fence the risks, lower cost of collaboration, make information available in time, and help farmers with a positive spiral of profits-investment-productivity. It will improve agricultural economics and make farmers independent. For detailed research about problems facing Indian agriculture and a schematic of Smart Agriculture Management System (SAMS), and references please refer to my paper titled, “A Solution To Farmer Suicides & Loan Waivers” available at http://bit.ly/RDagriculture.
 
 
(Rahul Prakash Deodhar is a lawyer, investor and author with experience spanning manufacturing, consulting, investment banking firms. He has advised a wide range of clients including Fortune 500 companies, public and private sector banks, hedge funds and private equity funds among others. He has developed econometric models for demand forecasting in real estate, metals, airlines, and shipping. He designed MIS and planning and budgeting systems, sales networks, and operations for large corporates. He has worked with Aditya Birla Group, CRISIL and Morgan Stanley. He is author of two books – Subverting Capitalism and Democracy and Understanding Firms. He can be reached at rahuldeodhar@gmail.com or at his website www.rahuldeodhar.com.)
 
Comments
PARSHA RAM DHAYAL
4 years ago
VERY THOUGHT PROVOKING ARTICLE, IN DEED. HOWEVER, IT ALL DEPENDS ON THE POLITICAL THINKING AND THE LEADERSHIP IS HAPPY IN DEALING WITH THE SYMTOMPS AND NOT REALLY INTERESTED IN GOING TO THE ROOTS OF THE PROBLEM. AGRICULTURE IS AN OCCUPATION WHICH FARMER IS ENGAGING IN ABSENCE OF ANY OTHER ALTERNATIVE AVENUE AVAILABLE. LOAN WAIVER IS NO SOLUTION AT ALL . IT IS FULL OF ECONOMICAL AND MORAL FALLACIES AND INEQUITUS AT BEST. THE DEFINITION OF FARMER IS SKEWED.
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