Ajay Shah: Making sense of farmers' suicides

While roughly 4,000 farmers commit suicide a year, about 150,000 women die every year during pregnancy.

The rise in farmer suicides may be associated with increased area under cotton and heightened price volatility of some grades of cotton. Public policy needs to take on the distortions of the cotton market. A "Chapter 11" procedure is required on the treatment of personal bankruptcy, so as to avoid suicides but not damage credit access for farmers. It is important to avoid disproportionate responses""like spending Rs 4,000 crore to address 4,000 suicides a year, while 150,000 mothers continue to die in pregnancy every year. Finally, the growing complexity of agriculture requires a shift from small farmer-entrepreneurs to sophisticated organisation structures.

Aggregate Indian data do not suggest there is a serious problem with farmers' suicides: for each 100 Indian urban men who kill themselves, there are 103 rural men. On an international scale, the suicide rate for males ranges from 11 per lakh in the UK to 70 in Russia. In a country of the size and diversity of India, any overall average number is bound to mask substantial geographical variation. So localised hot spots of suicide exist. For example, if an IIT with 3,000 students experiences one suicide by a student every year, this is a suicide hot spot of 33.3 per lakh.

In India, the farmer suicide hot spots that stand out are Maharashtra and Andhra Pradesh. Maharashtra had a sharp rise from 14.7 per lakh in 1995 to 57 in 2004. Cotton cultivation stands out in the farmer suicide stories of the media. While the area under cotton has been stable in Maharashtra, it rose in Andhra Pradesh from 0.4million hectares to 1.2 million hectares between 1987 and 2005. Did something change about cotton in recent years, which might explain a higher incidence of suicides?

An examination of prices of some grades of cotton, from 1994 onwards, is revealing. The volatility of many grades of cotton has slumbered. But some grades have had a sharp increase in volatility: e.g. the "Jaydhar" grade experienced a profound increase in volatility from 2002 onwards. Another grade where volatility has risen sharply in recent months is Bengal Deshi (fine).

Farmers' suicides could possibly flow from the oldest story of finance. A farmer is an entrepreneur. He puts equity and debt capital to work in taking a business risk. If there is a lot of debt, he is highly leveraged, and has a low ability to cope with shocks. When adverse price shocks come about, the leveraged firm lacks the financial depth in order to cope with them and goes into bankruptcy.

On the one hand, our standard prescription for a safe firm is to have low leverage when profit volatility is high. A highway project with a stable toll cashflow can have 2:1 leverage, but a highly risky cashflow like Infosys' should have little debt. Many farmers seem to do wrong by having a great deal of debt and inadequate equity. The profit volatility could itself change. For a farmer growing Jaydhar cotton, the leverage that might have been okay prior to 2002 was a very dangerous one when the volatility of Jaydhar prices went up dramatically.

What, if anything, should be done in terms of public policy responses to this situation?

The first point is that we should keep our heads on the marginal cost and marginal benefit of alternative avenues for curbing mortality. These suicides are a classic man-bites-dog story that gets played up by journalists. We should see the case of suicides as only one of the many problems of the country. As a simple counter-example, consider maternal mortality. While roughly 4,000 farmers commit suicide a year, about 150,000 women die per year in pregnancy. Does it make sense for Manmohan Singh to focus Rs 4,000 crore on 4,000 suicides a year, while the giant tragedy of 150,000 mothers dying in childbirth goes on unabated?

The second area of focus should be four policy levers on cotton. As shown above, some varieties of cotton have had high price volatility. But other varieties do not. A remarkable feature of cotton is how prices of different grades are uncorrelated. This suggests a lack of arbitrage which would equalise prices across locations and grades. These low correlations are caused by barriers against the movement of cotton within the country and local distortions such as the interference by the Maharashtra government in the cotton market. In addition, building modern futures markets, and freeing up imports of cotton, would yield safety.

The third issue is the treatment of personal bankruptcy. Developed countries have a notion of "Chapter 11", where a person declares bankruptcy, and is given immunity from creditors, subject to certain covenants. In India, we have approached debt relief with a view to catching votes. The debt relief being doled out owing to farmers' suicides is likely to do long-term damage to the credit access for the farmers who didn't kill themselves. Instead, what is needed is a careful and sensible look at the notion of Chapter 11. This should be driven by experts in economics and finance and not the politicians focused on farmers' suicides.

The fourth issue is to ask fundamental questions about how agriculture is organised. As emphasised above, a farmer is an entrepreneur. The world is inexorably changing, and the complexity of this firm will only escalate. A firm engaged in agriculture needs modern scientific knowledge, buys expensive inputs, trades in futures markets, and plans for uncertainty using ample equity capital. Most farmers lack this mix of knowledge and equity capital, and should not be in this business. It would make more sense to have corporations in agriculture. An agriculture corporation could control 10 square kilometres of land, and hire today's small farmers as staff.

The small farmer would have a good life as an employee of this agriculture corporation: he would get a stable income and support from different departments of the company in areas where he does not have knowledge, and would not have to supply the equity capital required for risk taking. The agriculture corporation would be able to access quasi-infinite equity capital through the stock market. To ask this staffperson to become a self-contained entrepreneur in the context of agriculture is as daunting as picking up an average industrial worker and asking him to become a self-contained entrepreneur.