In this essay we will discuss about the rural indebtedness in India. After reading this essay you will learn about:- 1. Extent of Rural Indebtedness 2. Nature of Rural Indebtedness 3. Causes 4. Effects 5. Debt Legislation.

List of Essays on Rural Indebtedness in India

Essay Contents:

  1. Essay on the Extent of Rural Indebtedness
  2. Essay on the Nature of Rural Indebtedness
  3. Essay on the Causes of Rural Indebtedness
  4. Essay on the Effects of Rural Indebtedness
  5. Essay on the Debt Legislation of Rural Indebtedness

Essay # 1. Extent of Rural Indebtedness:


No precise, reliable, and authoritative estimates are available regarding the size of the debt in the 19th century. However, investigations made from time to lime, revealed that an over-whelming majority of cultivators were ‘hopelessly’ in debt.

The Deccan Riots Commission found in 1875 that 1/3 of the occupants of govt. land were in debt; that the average debt per occupant was Rs 371, and that this debt covered 18 times the assessment of revenue. The Famine Com­mission of 1880 found that 1/3 of the land-holding class in the country was in deep debt while another 1/3, also in debt, was in a position to redeem it.

An enquiry conducted by Thornburn in 474 widely distant villages in the Punjab revealed that the cultivators in 126 villages were hopelessly involved in debt; in another 210 villages, they were seriously involved and only in 138 villages, the burden was comparatively light.

The total indebtedness of 474 villages was es­timated at Rs. 47.3 lakhs or roughly a little over Rs. 15 per acre. While this was the condition in the Punjab, evidence collected by William Crooke in U.P. and Col. C.K.M. in Rajputana goes to prove that the situation in other provinces was no better.


Assuming Thornburn’s figures as the average for the country as a whole, Dr. B.M. Bhatia concludes that the total debt of India in 1895 came to roughly Rs. 300 crores.’ Further assuming an average rate of interest of 18¾%, he calculates the annual interest charges as Rs. 56 crores or 1/6 of the entire agricultural income of India.

In 1901, the Famine Commission estimated that only less than 20% of the cultivators were free from debt and that the remainder was indebted to a greater or smaller extent. Sir Edward Maclagan was the first to estimate the rural indebtedness of the country as a whole.

According to him, it stood at Rs. 300 crores in 1911. Sir M.L. Darling, working on the basis of the Punjab figures, estimated it at Rs. 600 crores in 1925. The Central Banking Committee, basing itself on the Provincial Banking Committees’ reports, put the figure at Rs. 900 crores in 1929.

The Great Depression and the consequent steep fall in agricultural prices increased the rural debt by 50—100%. The debt in British India, excluding slates, alone was estimated by P.J Thomas to have increased to Rs. 1200 crores in 1933. The Agricultural Credit Department of the Reserve Bank of India put the figure al Rs. 1800 crores in 1937.


It is generally recognised that during the Great Depression, the burden of the debt had greatly increased. There is, however, an impression that during the period of high prices prevailing in the Second World War, the peasants had gained and the burden of the debt was reduced.

But certain independent in­vestigations during the period reveal that the war had only slightly reduced the amount of the debt though it was substantially higher than the 1930 level.

Dr. B.V. Narainaswamy Naidu found that “notwithstanding favourable war-time factors, the rural debt of the Madras Province stubbornly stayed at the high level of about Rs. 217.7 crores which was lower than the estimate for 1939 but higher than the figure of Rs. 150 crores estimated in 1930”.

Similarly, a resurvey of 258 villages in Mysore conducted by S. Nagappa in 1945, revealed that the amount of debt increased from Rs. 157 in 1941 to Rs. 359 per indebted family. The myth was finally exploded by the Gadgil Committee which noted that “the increase in the level of agricultural costs had mostly caught up with increase in the prices of agricultural products and had, in some instances, even passed it.”

The fact is that only a small proportion of families owning bigger holdings had benefitted from the war and the post-war high agricultural prices. The small landowners, tenants ad labourers, as a class, made no gain at all. Their position worsened and their debt increased.

On the basis of Naidu’s estimate, Dr. Ragnerkar estimated the total rural debt of India at Rs. 1100 crores. In 1951, the National Income Committee put the total rural debt at Rs. 1913.8 crores for the Indian Union, though Bhowani Sen finds Rs. 2000 crores a safer estimate.

The All-India Rural Credit Survey, conducted in 1951-52, found that 69% of the farmers were in debt and that the average amount of debt per family came to Rs. 364. Region wise, the Eastern belt of the country, comprising Bengal, Assam and Orissa held the lowest position in the burden of debt per family while the states of Madras, Punjab and Mysore occupied the top position, especially Madras which moved from about the middle to the top of the list.

Essay # 2. 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. Darling found that only less than 5% of the debt in the 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.

Essay # 3. Causes of Rural Indebtedness:

The view of writers like Darling that ‘extravagance and improvidence’ of the agriculturist was responsible for his debt and ultimate ruin does not find much support from the available evidence.

In this connection, we have the authorita­tive views of the Deccan Riots Commission (1875) that ‘undue importance has been given to the expenditure on marriage and other festivals…….. the expenditure forms an item of some importance in the debt side of the ryots’ account but it rarely appears as the nucleus of his indebtedness.


Nor would it be true to say that the money-lender and the methods of his business were to mainly blame for the indebtedness and poverty of the agriculturist. The Rural Credit Survey found that litigation and repayment of old loans accounted for only 5.7% of the total debt.

Notwithstanding Anstey’s view that “Indebtedness has not been so much, the result of poverty but a cause of poverty,” there is overwhelming evidence to prove that the poverty was more the cause than the effect of indebtedness.

According to S. Bose, “the chief cause of indebtedness was the general poverty of the cultivating classes. The small and fragmented holdings, the low productivity of land, made uncertain by the vagaries of the monsoon, hardly gave enough to a peasant to make both ends meet.”

In good years, the cultivator had nothing to hope for except bare subsistence, and in bad years, he fell on public charity. Under such circumstances, “to support a family upon a few acres without getting into debt required a level of skill, industry, and thrift seldom attained in a hot country.”


The cottage industry in India had, in the past, acted as a safety valve for those dependent on agriculture because it gave a second source of income to the farmer. Its decline deprived the farmer of his subsidiary occupation, thereby considerably reducing his income and compelling him to take recourse to bor­rowing.

Mention may also be made of heavy cattle mortality in ever recurring famines. Cattle, being the back-bone of the Indian Agriculture, had to be replaced at the earliest. This necessitated expenditure which the farmer met by raising loans.

It was agreed by the Famine Commission of 1880 that “the origin of the debt among the landed classes is traceable to the system of rigid and regular collection of land revenue.” That ‘the revenue- was levied at too high a rate’ is also admitted by Anstey. What was worse, it was generally collected before the crop was harvested.

Naturally, cultivators, being pressed for the payment of revenue instalment, had no alternative but to borrow. Had the recovery of in­stalments being more coincident with the marketing of the crop, instead of falling too early and sometimes too late, much temporary borrowing could have been avoided.

Another noteworthy feature of the debt was that the peasants inherited the debt of their fathers along with their properties and consequently “their present indebtedness is in great part a legacy from their forefathers.” Though the ryot could seek legal protection against this portion of the debt but he did not. Rather, it was accepted as a sacred obligation.

The growth of the debt was also ‘due to the accumulation of interest.’ The rates of interest charged were as high 100% in certain cases and varied from 18—40% in most cases. The high rates made it difficult for the peasant to clear the interest charges alone, leave aside the principal.


The Bombay Banking Com­mittee rightly remarks that “it is not that the agriculturist pays too little; he often pays too much. It is the high rate of interest and the malpractices followed by the money-lenders that tend to perpetuate his indebtedness.”

It is of interest lo mention in this connection that, according to the National Income Committee, the total annual income of the money-lenders in the Indian union was Rs. 86.5 crores. A better comment on the parasitic nature of the Indian economy cannot be offered.

Yet another factor was the institution of individual ownership in land. By so doing, the authorities made an unconditional gift of a valuable asset to every peasant proprietor and thus raised his credit from the former limits of the surplus of an occasional good crop to the market value of the proprietary right conferred.

This brought about a revolution in the status and relations of peasants and share­croppers. The peasant now found, to his surprise as well as delight, that his money-lender was now willing to accommodate him to any extent and he recklessly involved himself in debt.

The Law of the country, administered through the Civil Courts, was another contributory factor. Before the establishment of the civil courts, “under the native govt. it seems, no assistance was ordinarily afforded by the state to the creditor for the recovery of his debts.”

With the establishment of the British rule, justice began to be administered through a judicial system, the rigidity and technicality of which were not understood by the vast masses but which offered enormous advantages to education, astuteness and length of the purse in which the money-lender was superior to the landowner as a class.


The cultivators, pressed for money, were obliged to commit themselves to most ‘one-sided and ruinous’ written contracts with the money-lenders. The law courts upheld these contracts between two unequal parties.

Further, the new laws the Indian Con­tract Act and the Civil Procedure Code—were also in favour of the money-lending classes. They enabled them not only to secure their exorbitant claims bur also to attach the debtors’ cattle, implements, and even to arrest and imprison him.

Essay # 4. 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 lo 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 load 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 money­lenders. 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.” We may add that, in addition, it reduced him to the position of a medieval serf.

Essay # 5. Debt Legislation of Rural Indebtedness:

The steady increase in the volume of debt, the increasing realisation 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:

(a) For the improvement of the Civil Law,

(b) For restricting the ability of the cultivator to borrow,

(c) For regulating and Controlling the business of the moneylender,

(d) For providing debt-relief,

(e) For providing alternative sources of credit.

(a) 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 aw. 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.

(b) 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. 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.

(c) 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 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 properly 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.

(d) Debt Relief:

Restrictions on the money-lender, important though, did not being 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.

(e) 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 the authorities were not willing to countenance.