FARMER SUICIDES PROMPT PM SINGH TO ANNOUNCE AGRICULTURAL

UNCLAS SECTION 01 OF 03 MUMBAI 001266

SIPDIS

SENSITIVE
SIPDIS

DOC FOR 4530/MAC/AMESA/ASO/LDROKER/ASTERN
USDA FOR FAS'ITP/TPOMMEROW/JFLEMINGS/MFORD

E.O. 12958: N/A
TAGS: EAGR ECON EAID PREL IN
SUBJECT: FARMER SUICIDES PROMPT PM SINGH TO ANNOUNCE AGRICULTURAL
RELIEF PACKAGE

Summary
--------------


1. (U) Over 1,600 farmers in eastern Maharashtra's
drought-affected cotton belt in the Vidarbha region have
committed suicide in the past five years. The GOI has cited
crop failure, depressed cotton prices and spiraling debt as the
chief reasons for the suicides. During his June 30-July 1 visit
to the region, PM Singh announced an $830 million relief package
for the farmers. It includes debt rescheduling, interest
payment waivers, cash disbursements, funds for improved
irrigation and water harvesting techniques and measures to
diversify income sources for cotton farmers. Despite repeated
demands from the farmers, the PM did not announce measures to
prop up the low cotton prices that he himself acknowledged as a
main cause of rural indebtedness. The opposition BJP focused on
the price support issue in its criticism of Singh's package,
saying that the Congress-led government's reduction of tariffs
on imported cotton was a main cause of the farmers' plight.
Congress, which came to power largely because of the rural vote,
has been tardy in addressing this issue. Political compunctions
will now force it to spend lavishly on relief measures that
still may not convince skeptical farmers that it cares. End
Summary.

Cotton Producing Vidarbha Region Plagued by Farmer Suicides
-------------- --------------


2. (U) Over 1,600 farmers in the Vidarbha region of eastern
Maharashtra have committed suicide over the past five years,
with more than 600 taking their lives in this past year alone.
Most were cotton farmers who faced serious crop failures and
mounting personal debt and the loss of their land, which they
had presented to banks as collateral. The state of Maharashtra
accounts for 20 percent of India's cotton production. Most of
the area is under dry land farming and chiefly dependent on
rainfall for irrigation. Crop failure due to insufficient, or
poorly timed, rainfall and depressed cotton prices has left many
farmers unable to repay loans.

PM Intervenes and Announces Debt Relief Package
-------------- --


3. (U) On July 1, during his two-day visit to the affected
areas, PM Manmohan Singh announced a package of incentives for
farmers in the six-worst drought-hit districts of the Vidarbha
region - Amravati, Akola, Washim, Buldhana, Yavatmal, and
Wardha. The relief package, worth roughly $830 million, is a
grant and will come from the Prime Minister's National Relief
Fund. The Prime Minister will head a yet to be formed special
group to implement it.

Immediate Relief Measures
--------------


4. (U) The government will allocate around $100,000 to district
collectors in the six districts to be "used judiciously" for
immediate assistance to families affected by suicides and debt.
In addition, farmers will receive a waiver of overdue interest
on loans taken out before June 30. The financing, about $158
million, will be born equally by the federal and state
governments. Singh said the debt relief will free up farmers to
take out badly needed fresh loans.

Longer Term Measures
--------------


5. (U) The GOI intends to implement cash allocations and
interest rate relief on short notice. Other, longer-term
measures announced by Singh include:

-- The rescheduling of delinquent loans currently worth about
$290 million. Farmers will now have three to five years to pay
back their loans, and will not have to service them for one
year. The farmers' interest burden on these rescheduled loans
will not change. They will only pay the interest accrued on the
original loan for the repayment period.

-- The National Bank for Agricultural and Rural Development
(NABARD) will dispense additional agricultural credits of around
$283 million in the six districts during the current Indian
fiscal year, which ends in March of 2007.

-- Farmers will receive new cotton seeds worth about $40
million.

MUMBAI 00001266 002 OF 003



-- The GOI will allocate about $53 million for water harvesting
projects.

-- The government will create additional income sources for
farmers through a $30 million program aimed at establishing
cattle breeding facilities and fisheries.

-- A $50 million National Horticulture Mission will help
distressed orange cultivators.

-- The government will allocate around $484 million in the next
three years to complete irrigation projects in the six
districts.

-- The government will create an expert group to study the
problem of rural indebtedness, which will submit its findings
and recommendations within six months.

Singh said similar relief measures will also be implemented in
25 other debt-affected districts in India - 16 in Andhra
Pradesh, six in Karnataka, and three in Kerala.

Not Surprisingly, Opposition Criticizes Singh's Initiative
-------------- --------------


6. (U) Low cotton prices are the main reason for the debt
problems that have plagued small farmers in eastern Maharashtra.
The average farm is too small and too unproductive to weather a
significant downward shift in cotton prices. Not surprisingly,
the BJP opposition was quick to point out that the package
announced by Singh failed to address the price issue. Several
party spokesmen called on the GOI to increase its minimum
support prices for cotton, saying the relief package took "no
concrete steps envisioned for a holistic and long-drawn
solution." Party spokesmen laid the blame for the suicides on
the GOI's reduction of import duties on cotton, which critics
claim has suppressed domestic prices. (Comment: The current
government has actually increased the tariff for cotton from ten
to 14.67 percent by introducing the education cess and the
special additional duty. End Comment) Others expressed
skepticism that the money would actually reach the affected
farmers. BJP critics also focused on the Congress-led
Government of Maharashtra's decision to withdraw so-called
advance bonuses to farmers.

The Economics and Results of Poor Policy
--------------


7. (U) Cotton prices are lower because the Maharashtra state
government has withdrawn its cotton monopoly procurement program
and poor cotton yields related to adverse weather have
negatively affected cotton farmers' net returns. In the late
1970s, Maharashtra implemented a cotton procurement scheme which
gave a state government agency a monopoly to procure cotton from
the farmers at a pre-determined price. The state's monopoly
prices were well above (30-40 percent) the minimum support price
(MSP) announced by the central government, and generally higher
than market prices in other states. The higher monopoly prices
led farmers to increase their cotton cultivation in the state.


8. (U) However, the program was a big drain on the state's
fiscal budget, due to the higher cost of cotton procurement and
other inefficiencies absorbed by the state such as the storage,
processing and marketing of cotton. Despite various review
committees' recommendations to end it, the Government of
Maharashtra maintained the program because of political
compulsions. Three years ago, the state government decided to
phase out the program and allow procurement by private traders.
For the first two years it froze the monopoly procurement
prices, i.e., not allowing annual increases. For the third year
(2005/06 crop year),it eliminated the price support completely,
and procured cotton only at the lower MSP set by the Center.
Consequently, farmers received lower prices for their cotton
during the 2005/06 season.


9. (U) Because of the state's procurement program, cotton
emerged as the main cash crop in the Vidarbha region, displacing
many traditional crops like coarse cereals. However, cotton
farming requires higher cash expenditures for inputs such as
seed, pesticides and water compared to other crops. This
compelled most farmers to borrow money from moneylenders to buy
these inputs. Many Indian farmers live on the margin and are
therefore only able to offer their land as collateral to obtain
loans. Unfortunately, adverse weather conditions in the

MUMBAI 00001266 003 OF 003


Vidarbha region during the last two seasons resulted in cotton
crop failures and poor yields. This, combined with lower
prices, resulted in sharply reduced net returns to farmers for
their cotton crop during the 2005/06 season, leading to
increased indebtedness and suicides.

Comment:
--------------


10. (SBU) Although urbanization is reducing the numbers of
Indians living off of the land, sixty five percent of Indians
still live in villages and most Indians have family members in
the countryside. This means that farmer suicides hit a
sensitive nerve in Indian society, with politicians, media
commentators and NGOs from across the political and ideological
spectrum quick to provide their own explanations for the deaths.
Critics of globalization and liberalization, in particular,
like to cite farmer suicides as an example of the pitfalls of a
market-based modernization strategy. In reality, the rural
indebtedness and general hopelessness that leads to the deaths
in the poor rural regions of eastern Maharashtra are not new
phenomena. Indian policy has suffered from a strong urban bias
resulting in decades of systematic neglect by the central and
state governments which has denied most farmers the opportunity
to modernize and escape the vicious cycle of nearly subsistence
agriculture. Successive Maharashtra governments deserve
particular criticism for ignoring the needs of the state's
poorest farmers. One cannot claim that the state ignores
agriculture, since it does have a track record of inefficient
and distorting support schemes for farmers, such as power and
water subsidies. However, much of the state's attention goes to
the wealthier sugar and wine industries that have the cash flows
and financial resources to support the patronage and pork barrel
politics so characteristic of Maharashtra state politics.


11. (SBU) Most political observers credited the UPA's 2004
electoral victory to rural frustration with the NDA government's
concentration on the urban middle class. Despite this, the UPA
has taken over two years to focus on the plight of the Vidarbha
farmers and has now had to scramble to put together a very
expensive relief package. To his credit, PM Singh did not
mention any plans to raise import tariffs on cotton during his
Vidarbha visit, although it would have silenced the opposition
and provided tangible political benefits. Reversing such an
important liberalization measure as the systematic lowering of
India's import tariffs would have sent all the wrong signals
about the GOI's commitment to reform and diverted attention from
the complex political, economic and social reasons for farmer
suicides. End comment.


12. (U) Embassy New Delhi cleared this cable.
OWEN