Making sense of farmer suicide

Business Standard, 5 July 2006

The rise in farmer suicide 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 does not suggest there is a serious problem with farmer suicide: 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 0.4 to 1.2 million hectares between 1987 and 2005. Did something change about cotton in recent years, which might explain a higher incidence of suicide?

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).

Farmer suicide 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.

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, leverage that might have been okay prior to 2002 was 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?

Back up to Ajay Shah's 2006 media page
Back up to Ajay Shah's home page