Microcredit in India, a response to climate challenge?

In November 2020, thousands of Indian farmers gathered outside Delhi to protest against new laws liberalizing the agricultural sector. These measures have fanned the flames of anger among farmers, who were already denouncing inadequate incomes, massive over-indebtedness and corruption surrounding subsidies.

In India, the world's fifth-largest economy and fourth-largest agricultural producer, the sector employs half the population but accounts for only 16% of GDP. In this water-deficient country, the economic situation of Indian farmers is closely linked to climatic events. According to a World Bank report, 26 million people in India sink into poverty every year as a result of natural disasters1 . In his study, economist Timothée Demont analyzes the effects of community microcredit groups in combating income variations linked to climate shocks.

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Income based on unpredictable weather

In the 1990s, in response to extreme poverty and fluctuating incomes, India's National Bank for Agriculture and Rural Development (NABARD) set up large-scale Self-Help Groups (SHGs) throughout the country. The principle is simple: a group of around 15 women is formed in each village. They contribute a certain amount of money each week, and use this common pot to grant loans to those who need them, setting an interest rate and repayment schedule in advance. These loans can be used to finance farm-related purchases (fertilizer, equipment rental, stock purchases), as well as health, education and consumer expenses.

Timothée Demont's research focuses on 36 villages, all located in the Jharkhand region, with a variety of climates and weather events. The villages were selected at random, using a method known as "randomization". Popularised by the Nobel Prize-winning economist Esther Duflo, this method enables the selection of statistically identical villages. Starting in 2002, the local NGO partner PRADAN set up microcredit groups in the randomly selected villages, with the other villages in the study acting as control villages. The researcher then studied the gap between the "treated" and "control" villages over a six-year period, to assess the effect of Self-Help Groups on the villages' economic resilience in the face of water scarcity.

Eastern India, the study region, is particularly vulnerable to weather conditions, since the majority of crops, mainly rice paddies, depend on rainfall. With no irrigation system in place, rice paddies need abundant monsoon rains during the summer months to ensure a sufficient harvest in the winter months, enabling them to generate enough income for the coming year, and the purchase of new seeds. However, the balance is fragile. In some years, days of drought follow on from one another, the monsoon arrives too late or brings insufficient rainfall. In 2019, the delayed monsoon caused the loss of 22% of the national rice production, with dramatic effects on the incomes of hundreds of millions of families.