Countless trees have been sacrificed in the last three weeks discussing the agriculture loan waiver in print. With all due respect to the many learned government spokespersons and other supporters of the measure as well as its equally eloquent critics, I would like to submit that indebtedness is not the heart of the problem of agriculture in India. It is perhaps the most visible symptom of it, but the real malady lies elsewhere.

The root cause of the crisis is the income-deficit of the sector. This may sound too simple, or even simplistic, but most seemingly complex situations do have a simple causation at their core.  The term income-deficit needs clarification. At a basic level, it means that the income derived from the activity is not sufficient to meet the consumption needs of the recipient.

Defining consumption needs is a messy affair and cannot be done entirely objectively, unless it is reduced down to sheer survival levels, whence the concept of the poverty line. It depends on numerous social, economic and cultural factors which would have substantial subjective elements. It would also vary from time to time, region to region and within their sub-groups as well.

The point to note is that most agriculturists, and not just those below the poverty line, believe that their income does not allow them to live in what they consider to be a minimum acceptable manner. Their response then is something all economists and accountants warn against: mixing stocks and flows, using assets to meet consumption needs.

Indian farmers are hardly alone in this behaviour. Native American Indians sold their land at throwaway prices to white settlers to pay for the blankets, pots and pans, and firewater.

The burning issue of today's global economic crisis, the subprime meltdown, is of the same origin. Stephen Roach of Morgan Stanley Asia perceptively observed in The New York Times (March 5, 2008): "Over the past six years, income-short consumers made up for the weak increases in their paychecks by extracting equity from housing bubble through cut-rate borrowing that was subsidised by the credit bubble." A change of only a few words in this statement would make it relevant to Indian agrarian indebtedness today. Low incomes on one side and relatively inflexible consumption needs on the other, squeeze the farmer into a situation of overdue payments and possible defaults on loans, with suicides as a horrifying extreme response.

The distinction between borrowings from institutions and private lenders is to an extent pointless, because most rural families borrow from both. Similarly, a distinction between loans for cultivation and asset creation, or in cash and kind is also somewhat redundant, because there is a great deal of fungibility in these transactions.

Borrowings from one source being used to repay loans from another, or converting material supplies into cash through their distress sale, are not exactly uncommon occurrences. What they point to is the paramount place of consumption and a possible recourse to desperate actions to meet their needs.  This has been going on for generations, as document after document on the subject dating back over 150 years would testify.

The government response has ranged from reducing or deferring interest, rescheduling, extending, and twice in the last 20 years, waiving the overdues. These measures have invariably acted as palliatives, with the problem recurring periodically and almost predictably, with a greater magnitude each time.

Paracetamol can only break the fever, but not make the basic disease go away. With the waiver scheme and its own self-congratulatory mood, this time the government, which ought to know better, has joined the farmers in confusing stocks with flows.

One could argue that institutional loans do make allowances for consumption needs. If there is lower income in an adverse year, there would be compensatory increases in a good year and loan and repayments are based on averages. Therefore, defaults or overdues in one period could be made good potentially in another, presumably good, period.

Reality works differently. Certainly farmers have no ability to meet their repayment obligations in a bad year.  But the surpluses in good years do not wholly compensate for these shortages.  Deferred consumption expenses, even rites and ceremonies, take priority and the income surplus diminishes or vanishes altogether, without any attribution of malafides.

The simple truth of rural India is deficits are cumulative, surpluses are not. The borrower never escapes the debt trap, and not only because of the usurious practices of private money-lenders. Under the circumstances, the current loan-waiver is what such measures have always been: a palliative, if a much-needed one at that, but not the panacea it is made out to be.

The crisis of indebtedness will recur, because of basic structural factors and not what some critics of waivers call the "default culture" they are supposed to encourage. This will happen sooner rather than later, one hopes (likely in vain) not in as severe a fashion as now, requiring yet another infusion of relief. This is only one, and possibly a minor, element of the Sisyphean challenge of Indian agriculture.

The problem of income deficit arises from three basic causes: first, adverse terms of trade (which means farmers pay more in real exchange terms for the goods and services they buy than what they get for those that they sell); second, low productivity of resources engaged in agriculture, and third and possibly most important, the disproportionately large dependence of population on agriculture for its livelihood. 

Each of these has been commented on but they need to be seen together, to understand the real Sisyphean nature of the task and its possible lethal consequences for the country. These will be discussed in subsequent instalments of this series.

This is the first in a three-part series on Indian agriculture

Also read: "What is food crisis?"