Rural Indebtedness in British India

Introduction

Rural indebtedness has always been an important feature of agrarian economy of India, however, it was from the mid of 18th century that the problem of rural indebtedness started becoming noticeably serious. From this time onwards, the British used their control over India to elevate their own interest. The nature of British rule and its policies, changed with the changing pattern of Britain’s own social, economic and political development. Under colonial rule, land revenue was of notable importance because not only it occupied a very pivotal position as a source of revenue to the Government, but it also played a vital role in regulating the general administration of the country.

The factors that accounted for the growth of rural indebtedness can be studied under two heads, namely

  1. The agriculturists borrow money: 

It was a direct consequence of the British administrative system. The new agrarian relations introduced by the British made them a commodity. The agriculturist now had a tangible asset against the security of which he could borrow. Also, over a period of time, the value of land increased due to increased demand associated with growth in population, commercialization of agriculture etc. This was instrumental in raising the borrowing capacity of the agriculturist.

  1. Compelled to borrow money: 

It enabled the agriculturist to borrow as the increased keenness of the money lenders to lend. In the pre-British period there existed a powerful and active village community which frowned at excessive lending and borrowing and also protected the individual cultivator from exploitation by the moneylender. Further, the state took no interest in assisting the moneylender in the recovery of loans. For this, tie was dependent upon the Village community.

Thus the money lender could not indulge in ruthless exploitation. Both these constraints vanished under British rule. The Village Community disintegrated and the civil laws enacted by the British and the law courts instituted by them were helpful in assisting the moneylender in the recovery of interests and debts. In the pre-British days, custom generally limited total compound interest to 50 percent of the principal amount, in case of cash loans, and to 100 percent, in case of grain loans. Under British rule, no such limit was recognized by the court and interest accumulated endlessly. All this made the moneylender keen to lend money to the agriculturists.

Dealing with the factors which compelled the peasants to borrow, we can attribute it to the British policy of monetizing land revenue payment and the exorbitant rates of land revenue. Natural calamities also often compelled the peasants to fall into debt.

The Royal Commission on Agriculture in India, 1928 was created in British India to examine and report on the conditions of the farmers. Thus, it is quite correct to observe with M.L. Darling that “Indian farmer is born in debt, lives in debt and dies in debt”.

Nature of Rural Indebtedness

The tragedy of this debt did not lie in its volume nor in its rate of growth. The cause for worry was the unproductive nature of this debt. As early as 1895, Nicholson had found that only 1.3% of the registered loans in Madras were due to land improvement. M. L. Darling found that only less than 5% of the debt in Punjab was caused by land improvements.

In the United Provinces, the Provincial Banking Committee found that 70% of the then existing debt was contracted for unproductive purposes and the same was more or less true of Bengal and Bombay also. The situation had not changed for any the better when the Rural Credit Survey Committee found 56.3% of all loans as unproductive (marriage and social ceremonies).

Causes of Rural Indebtedness in India

The following are the important causes of rural indebtedness in India:

  1. Poverty: 

Indian farmers are very poor and do not have any past savings to repay their debt or to make improvements on their land. Thus, poverty forces the cultivators to multiply their debt.

  1. Defective Agricultural Structure: 

Rural indebtedness is also resulted from defective agricultural structure which includes defective land tenure system, adoption of outdated techniques, increasing pressure on land, defective marketing, absence of alternative sources of income etc.

  1. No Past Savings: 

Indian farmers have a tendency to borrow funds for the improvement of their land and agricultural operation although they have no past saving.

  1. Unproductive Expenditure: 

Indian farmers are very much accustomed to making huge expenditures for unproductive purposes such as marriage and other social ceremonies. All these have led to growing indebtedness of the farmers of the country.

  1. Ancestral Debt: 

Indian farmers inherit their father’s debt.

  1. Unscrupulous Moneylender: 

Moneylenders in India are also very much responsible for the growing rural indebtedness in the country as they encourage the Indian farmers to borrow, charge a very exorbitant rate of interest and manipulate their accounts.

  1. Uncertain Monsoon: 

Indian agriculture is very much depending on monsoon. About 65 per cent of the agricultural operations are rainfed. As rain is most uncertain, therefore, agricultural operation has become a gamble in monsoon.

  1. Illiteracy of Farmers: 

Most of the Indian farmers are illiterate. Unscrupulous moneylenders or mahajans are utilizing this weakness of farmers to create a vicious circle of indebtedness.

  1. Fragmentation: 

There is a growing trend of sub-division and fragmentation of land holdings which has been resulting in a poor level of income for Indian farmers. Such poor income forces the farmers towards growing indebtedness.

  1. Litigation: 

There is an increasing tendency of litigation among the Indian farmers which has magnified the problem of indebtedness in the country.

  1. Defective Marketing: 

Agricultural marketing in India is very much defective. This never allows the farmers a remunerative price for their products and sometimes forces them to go for a distress sale. Such a situation is highly responsible for growing poverty and indebtedness among the Indian farmers.

  1. Natural Calamities: 

Natural calamities like floods and droughts and backwardness of agriculture are also widely responsible for growing rural indebtedness in the country.

Thus, all these factors are responsible for growing rural indebtedness in India.

CONSEQUENCES OF RURAL INDEBTEDNESS IN INDIA

The consequences of rural indebtedness in India are analyzed below:

  1. Pauperization: 

Growing rural indebtedness is highly responsible for growing pauperization of the small and marginal farmers in India.

  1. Loss of Interest: 

Interest in cultivation is gradually being lost by the small farmers as they are deprived of much of their produce by the moneylenders due to their indebtedness.

  1. Distress Sale: 

Indebted small farmers are forced to sell their produce at a very minimum price.

  1. Bonded Labour: 

Indebtedness creates a class of landless labourers and tenants who have very little or nothing to pay to the landlords and moneylenders and become the bonded labour or solves the landlords. All these have direct social consequences in India.

  1. Poor Livelihood: 

The growing rural indebtedness has raised the problem of repayment of loan along with interest which forces the farmers to adopt a poor livelihood.

  1. Transfer of Land:

The growing burden of indebtedness has forced the farmers even to sell their land to moneylenders and mahajans and thereby become a landless agricultural labourer.

  1. Evil Social Impact: 

Growing indebtedness usually divides the society into haves and have-nots leading to a rise of class conflicts in the society. This is really dangerous.

  1. It erupts in the form of class conflict: 

The society is inflicted with inefficiency that hinders the pace of growth. Thus, rural indebtedness has many evil consequences and steps must be taken to remove it as early as possible.

Remedial Measures to Solve Rural Indebtedness in India

The following measures can tackle the problem of rural indebtedness in India in an effective manner:

  1. Settlement of Old Debt: 

Proper legislation enacted to cancel or to reduce the extent of ancestral debts and non-institutional debt held by the small farmers of the country.

  1. Reducing Dependence on Moneylenders: 

Institutional credit network comprising of co-operatives, commercial banks, regional rural banks etc. be expanded for reducing the dependency of the farmers on the money-lenders.

  1. Control of New Loans: 

Proper steps must be taken in such a way so that farmers do not resort to borrowing for non-productive purposes. Thus unproductive loans for the celebration of marriages and births should be completely avoided. By imparting proper education and propaganda, the Government can help the farmers of the country to become conscious in this respect.

  1. Control over Moneylenders: 

In order to control the growing menace of rural indebtedness, activities of the moneylenders should be controlled. In the meantime, various state governments have passed different acts to make it mandatory on the part of moneylenders to obtain license for their money lending operations and also to maintain proper accounts and also to have a control over the rate of interest charged by them.

  1. Checking Transfer of Land: 

In order to have a check on the transfer of land for non-agricultural purposes as a result of non-payment of loan by the farmers the Government has already enacted various laws for protecting the farmers interest.

  1. Encouraging Savings: 

Farmers should also be encouraged to adopt saving habits in a routine manner. The co-operative credit societies can also play an important role in this regard. In the meantime proper legislation has been enacted in some states to prevent the sale of land by the farmers to the moneylenders.

The problem of rural indebtedness is linked with the larger issue of rural poverty. Poverty alleviation measures have to be taken up on a war footing to augment the income of the ruralites. Mobilization of local, social and economic resources, an equitable distribution of benefits of new agricultural strategy and establishment of a good number of co-operatives and commercial banks will go a long way in mitigating the magnitude of rural indebtedness from the rural social matrix.

Effects of Rural Indebtedness

The chronic, heavy, and ever-increasing debt led to certain grave economic, social, and moral consequences. Indebtedness impoverished the farmer in two ways.

Firstly, it deprived him of a considerable part of his income by making him pay exorbitant rates of interest and by very often obliging him to sell the whole produce to the creditor at much below the market price. As the Rural Credit Survey Committee observes, “often enough, the cultivator’s position is that of having to bargain, if he can, with someone who commands the money, commands the credit, commands the market.”

Secondly, it forced him, in the long run, to part with his land. Land, once pledged, was seldom redeemed. It passed into the possession of the money-lenders, reducing the real owner to the position of a tenant. Commission after commission noticed this process.

In the Punjab, the cultivators sold, on an average, about 9.89 lakh acres between 1866-1890. In the Banki govt. estate (Cuttack, Orissa) Dr. Mukherjee found that in the thirty years, 1888-89 to 1919-20, Mahajans had added, by purchase, nearly 85% to their acreage.

In Akola taluk in East Khandesh cotton area, non-agriculturists increased their holdings by 25% within three years. Thus, the proprietors of holdings lost their land gradually to the money-lending classes.

This transference of land into the hands of the money-lender did not result, as it did in other countries of the world, in consolidation of holdings and large-scale production. Rather, it led to sub-division and fragmentation of land. The money-lender was not an agriculturist himself.

Even where he was, it hardly made any difference. He never cultivated the land himself nor was he interested in taking possession of land. Instead, he employed the old cultivator-owner either as a tenant or a share-cropper who paid over to the money-lender the greater part of the produce as rent and interest combined.

Debt led to agricultural inefficiency. A person overwhelmed with debt could have little incentive for making the utmost use of his lands or for introducing better crops and better methods. Hence the poor response to the work of the Agricultural Departments.

The worst effect of indebtedness was to reduce the peasant to the position of a serf. Having been dispossessed of his land, the agricultural labourer often mortgaged his personal liberty in exchange for a small loan. The loan could never be repaid and the poor peasant, already reduced to the status of a mere labourer, remained a life-long slave of his creditor, working for his master and living on his charity.

The Hali of Gujarat, Kaimuti in South Bihar, Harawah in Central India, Pannaiyal in Madras and the Bhagela in Hyderabad were all reduced to enduring a life of servitude in return for a petty loan. In Bihar, such agreements were declared null and void under an Act of 1920 but the Kamia was “too powerless to set the law in motion and the law appears to have failed.”

Dr. Thomas rightly remarks that “a society steeped in debt is necessarily a social volcano. Discontent between classes is bound to arise and smouldering discontent is always dangerous.” The exploitation of the peasantry at the hands of the money-lender shattered the traditional peace and harmony of village life and created, in its place, tension, anger, and a smouldering feeling of revenge.

There were stray cases of looting and murder of the money-lenders. An extreme reaction to the money-lenders’ extortion was what is known as the Santhal Rebellion (1855), when hundreds of them proceeded to “take possession of the country and set up a govt. of their own.”

The Deccan Riots of 1875 in which “peasants spontaneously rose in many places and robbed and wrecked the houses of the money-lenders” were again an expression of the peasant anger against the money lenders. And so were the riots in Ajmer in 1891.

Thus, indebtedness, from which the peasant had not even a remote hope of escape, turned him into a “dishonest debtor, an inefficient farmer, thriftless head of the family and an irresponsible citizen.” In addition, it reduced him to the position of a medieval serf.

Debt Legislation of Rural Indebtedness

The steady increase in the volume of debt, the increasing realization by the govt. that the ignorant and helpless peasant had neither ‘the bargaining power nor the capacity’ to protect his interests and the agrarian unrest forced the govt. to act on behalf of the peasant in the seventies of the last century.

Thus were initiated a series of measures designed to protect the peasant against exploitation at the hands of the money-lender.

These measures broadly included steps –

  1. Improvement of the Civil Law:

The Deccan Agriculturists Relief Act, passed in the wake of the Deccan riots in 1875, was the first important antimony-lender measure adopted by the authorities. The Act aimed at curbing usury and fraudulent practices on the part of the money-lender, simplifying the legal procedure, and scaling down rural debt.

An amendment was also made to the Indian Contract Act in 1899 which provided relief to debtors in cases where the bargain contained any provision by way of penalty or where it was found that the debtor had entered into a senseless bargain under the pressure of the money-lender.

The Usurious Loans Act, 1918, empowered the courts to reopen any transaction if it was found that the rate of interest was ‘excessively high’ or the transaction itself was ‘substantially unfair.’ In such cases, the court was given the power to relieve the debtor of all liability in respect of any excessive interest.

Apart from being vague, the major defect in the Act was that it applied only when the debtor filed a suit in a court of law. Though the Act was amended in 1926 to remove this particular lacuna, the courts were not empowered to give a retrospective effect to its provisions.

  1. Restrictions on the Ability of the Cultivator to Borrow:

After 1879, the govt. took no major step against the growing menace of rural indebtedness till the close of the 19th century when the authorities, taking alarm at the speed with which land was passing into the hands of the non-cultivating classes, felt compelled to seek out a more drastic remedy than was hitherto tried.

The govt. now became convinced that the unrestricted power of transferring their land by sale or mortgage was the major cause for growing rural indebtedness in India.

The first major embodiment of this new policy was the Punjab Land Alienation Act of 1900. Under this Act, non-agricultural classes were prohibited from buying land from an agriculturist or to keep it in mortgage for more than 20 years. The Act, in brief, prevented the non-agricultural money-lender from taking over the land of the agriculturist in lieu of debt repayment.

The act was extended, with some changes, to the N.W.F.P. (North-West Frontier Province) in 1904 while a similar Act was passed for Bundelkhand district of the United Provinces in 1903. The same restriction was placed in Bombay through the Land Revenue Amendment Act passed in 1901.

The Land Alienation Act, described by Lord Curzon as “the first serious step in a movement which is designed to free the agricultural class in this country from an incubus which is slowly but steadily wearing them down,” was not designed to relieve the existing indebtedness of the peasant or to check its future growth.

Its real purpose was to prevent the evil of the peasantry of the Punjab being expropriated by the money-lender which was an ever-increasing political danger. That is why the transfer of land to agricultural classes was fully permitted.

Soon, therefore, a new evil of benami transfers arose under which the land was nominally transferred to an agriculturist but the real benefit of the transfer went to a non-agriculturist. Necessary amendments were, therefore, made in the Punjab Act in 1938-39 whereby certain restrictions were placed on benami transfers and on the acquisition of land by agricultural money-lenders.

  1. Regulation of the Money-Lender’s Business:

The Great Depression of the thirties so much worsened the condition of the ordinary farmer that the govt. now felt compelled to exercise sonic control over the business of the money-lenders also. Acts were passed in various states placing varied restrictions on the money-lender and his business.

The main provision of the legislation related to:

  1. Licensing and registration of money-lenders;

  2. Maintenance of accounts in prescribed forms;

  3. Furnishing of receipts and periodical statements of accounts to debtors;

  4. Fixing of maximum rates of interest chargeable;

  5. Protection of debtors from molestation and intimidation;

  6. Exemptions from attachment of debtor’s property;

  7. Regulation of mortgages; and

  8. Penalties for infringement and machinery for enforcement.

The details of licensing differed from province to province. What is notewor­thy is that licensing itself as a requirement was not uniformly imposed in all provinces. The provisions which sought to regulate the money-lenders’ rate of interest also differed. In most states, the maximum rate is merely limited to what the money-lender could recover through a court of law.

Only in some states, it was a punishable offence to charge more than the maximum. Regulation of mortgages, exemption of property from attachment, and protection of debtors from molestation are items which, in some states, figured in the measures of legislation dealing with debt relief; in certain others, the relevant provisions oc­curred in both money lending and debt relief legislation.

Several acts contained provisions for the automatic redemption of mortgages in certain circumstances and after the expiry of a specified period. The most usual form of penalty for infringement of the law was denial to the transgressing creditor of the right to resort to courts for the recovery of even his legitimate dues.

The Rural Credit Survey Committee reported “large-scale and countrywide evasion of the restrictions imposed on the money-lender. Much the larger part of money-lending is carried on without licence, even where such a licence is obligatory.”

The Report further reveals how legislation to curb usury had be­come a complete failure. The money-lenders evaded the law by obtaining a promissory note for a larger amount of principal than actually lent or by computing interest at illegal rates and deducting in advance from the amount lent.

  1. Debt Relief:

Restrictions on the money-lender, important though, did not bring much relief to the farmer. Rather, the burden of the debt became so oppressive and so universally felt that the peasantry in many regions rose in revolt. The dangerous prospects of the emergence of a landless peasantry became imminent.

The govt. became panicky and steps were taken to provide immediate relief in the form of a moratorium. Several states passed acts, whose main purpose was to prevent the transfer of land and other assets for a certain period (normally one year) from the debtor to the creditor and to stay the proceedings against the agriculturist debtors for debts or arrears of rent.

In short, it allowed a temporary suspension of debt—repayments and gave breathing time to the debtor to consolidate his financial position.

The next stage was the reduction of debts on a voluntary basis. For this purpose, legislation was passed in many states to set up, in the form of Debt Conciliation Boards, a machinery through which debtors could be assisted to get the consent of their creditors to a reduction of the debt and its repayment in easy instalments. Loans taken from banks or co-operative societies were excluded from the operation of these acts.

These boards tried the method of persuasion to bring about a settlement between the parties. The agreement, so reached, was made binding like an order of the court. The results are summed up by the Gadgil Committee which found “in Bengal, till the end of 1941, a total debt of Rs. 5016.2 lakhs was scaled down to Rs. 1796.29 lakhs representing a reduction of 64%.

In central provinces and Berar, Rs. 1561.02 lakhs were reduced to Rs. 774.85 lakhs i.e. to little less than 50%. In the Punjab, during 1939-40, debt of Rs. 91.45 lakhs was scaled down by Rs. 55.6 lakhs. The relief courts established in Madras and central provinces scaled down claims of Rs. 931.21 lakhs and 428.09 lakhs to Rs. 440 lakhs and Rs. 299.8 lakhs respectively.”

These reductions, though substantial, did not signify any great relief to the peasants for even what remained after the deductions constituted a sum far beyond their means. No machinery was set up to help the peasantry to redeem the scaled down debt. Besides, conciliation provided under the acts was entirely voluntary and the machinery of debt conciliation could come into operation only when invoked by the debtor.

From the voluntary principle, the transition was to compulsion. The first attempt at compulsory scaling down of debts was made in the small Bhavnagar state in 1932 where the Durbar compromised the total debt of the ryots amounting to Rs. 86.38 lakhs for Rs. 20.50 lakhs.

The creditors were paid off in the first instance by the Stale authorities and the same was recovered in instalments along with land revenue. In British India, the lead was given by Madras. The Madras Agriculturists Relief Act, passed in 1938, prohibited the creditor from recovering, in the aggregate, more than twice the original loan. More or less similar legislation was enacted in other states also.

Measures for the compulsory reduction or ‘adjustment’ of debts usually contained provisions for:

  1. Reduction of principal as well as interest in accordance with certain scales

  2. Fixing of the maximum rates of interest chargeable on outstanding debt and, in some cases, on new loans;

  3. Extended applicability of the law of Damdupat i.e. total interest paid or payable should not exceed the principal;

  4. Limits on the size of adjustable debt;

  5. Regulation of mortgages;

  6. Protection of the agriculturist against certain legal proceedings; and

  7. Exemption of specified items of property from attachment.

In C.P. and U.P., the debts were compulsorily reduced by a certain percentage on the basis of the estimated fall in the value of land but the Bombay Act provided for the establishment of Debt Adjustment Boards which ascertained the repaying capacity of the debtors before the debts were brought down.

From the available data of debt actually settled by courts, it may be broadly said that “in most part A States, debt adjustment involved reductions ranging from 40—60% and in part B States, from 20—40%.” Understandably, the confidence of the money-lenders was shaken and there was a shrinkage of credit. There was also a decline in the number of unsecured loans.

The legislation to protect the agricultural debtor made the money-lender extremely cautious and he now began to insist on the mortgage of land or on a conditional sale deed. Yet another flaw was that efforts at help and relief were mostly directed to help the big borrower. Debts which could be conciliated were very large Rs. 50,000 under the C.P. Act and Rs 15000 under the Bombay Act.

Even the power to declare a debtor insolvent applied only to those whose debts amounted to more than Rs. 500. Thus the smaller debtors, who needed relief the most, were left much less cared for. Yet another limitation of the debt relief legislation was that it made no provision for slate help for the repayment of loans. The result was that many debtors defaulted even in respect of their reduced debts.

The main fault, however, was that the debt legislation did not touch the root of the problem. Rural indebtedness was only a symptom of a deep-rooted disease. The legislation provided only first-aid relief—at best preventive but not curative. The basic problem was and still continues to be poverty of the farmer and it was this which needed to be tackled.

  1. Alternative Sources of Finance:

Finding that the money-lender’s credit was costly and often ruinous to the agriculturist and that it failed him just when it was most needed, the govt. began to give direct help to the farmer.

Under the Land Improvements Loans Act, 1883, long-term loans were advanced for making permanent improvements on land while the Agriculturist Loans Act, 1884, permitted short and medium- term loans for current agricultural needs such as purchase of seed, grain, and cattle.

However, conditions for the grant of these ‘taccavi’ loans were difficult and often involved long delays. Help given was meagre while recoveries were very strict.

Another agency for providing agricultural credit were the cooperative societies set up under the Act of 1904. Although the movement had greatly expanded, both in quantity and quality, yet, in 1951—52, it met only 3.1% of the credit needs of the agriculturists. We may conclude by saying that the debt of the cultivating classes was and continues to be but the symptom of a deep-rooted disease.

The debt legislation was, at best, of the nature of first-aid work, which left the roots of the disease untouched. Legislation for scaling down the debt or restricting the activities of the money-lender could not have cured the disease; not could the fixation of a maximum rate of interest or any system of registration and account-keeping solve the problem.

The problem of rural indebtedness is linked up with the broader question of India’s poverty and no solution of this problem is possible without a thorough reconstruction of the corporate life of the country. And this authority was not willing to countenance.

Post a Comment

Previous Post Next Post