Singh just before he hung himself.

Photographer: Sonu Mehta/Hindustan Times via Getty Images

Modi's Moment of Truth

Dhiraj Nayyar is a journalist in New Delhi. Trained as an economist, he has worked at the Financial Express, India Today and Firstpost.com. He is editor of "Surviving the Storm: India and the Global Financial Crisis."
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The apparent suicide of a distraught farmer at a well-attended rally in the heart of New Delhi has captivated the Indian political world. It may also herald the biggest crisis of Indian Prime Minister Narendra Modi’s 11-month old government.

QuickTake India's Aspirations

True, questions have been raised about the background and real motivations of Gajendra Singh, who hung himself from a tree during a demonstration called by the Aam Aadmi ("Common Man") Party on Wednesday. Critics have also lambasted AAP organizers for not immediately calling off the rally. The fact is, however, that the tragedy could not have come at a worse time for Modi.

India's opposition Congress Party has recently found its voice by painting the government as anti-poor and challenging Modi's efforts to amend a restrictive land-acquisition law. Worse, new forecasts predict a lower-than-normal monsoon this year. That would drive up food prices and inflation, and limit the central bank's room to trim interest rates. With reforms bogged down in Parliament, Modi can ill afford any new constraints on growth.

Clearly, the Prime Minister needs to address widespread distress among Indian farmers, almost 1,400 of whom committed suicide last year after suffering from debt, crop failure and drought. But his response must be thoughtful and multi-dimensional.

The clamor for him to abandon attempts to reform the land law, for instance, is misplaced. Singh didn't kill himself because unscrupulous developers had snatched his property. According to a suicide note, unseasonal rains had wiped out much of his recent crop. As I wrote recently, Indian farming remains far too dependent on the goodwill of the weather gods: Too much rain and too little are equally problematic. Farmers have few options -- such as crop insurance -- to mitigate risk.

More importantly, most landholdings in India are simply too small to be profitable. Half of the population -- around 600 million people -- cannot live off 15 percent of India's GDP. The only long-term solution to India's farm crisis is to reduce the number of farmers. To do so, infrastructure and job-producing factories need to be built -- and those require land. As long as farmers are compensated properly (even Modi's amended law would guarantee compensation at four times the market price), selling their land could help tide them over until jobs materialize.

Some of the other fixes being bandied about are equally short-sighted. Modi should think carefully before he announces a wholesale waiver of farm loans, or a broad increase in the "minimum support price" the government guarantees farmers for their crops. The former penalizes farmers who have repaid their loans on schedule and presents a moral hazard  for the rest. Beefing up support prices usually benefits the largest farmers disproportionately. The rest, who are net buyers of food, suffer from the inflationary impact of the increases.

The government needs to move faster to a model where it can distribute cash aid directly to the poorest farmers, depositing money into their bank accounts. More immediately, there are at least three things Modi can do that would fundamentally improve farmers' prospects and ability to withstand misfortune.

First, he should offer subsidized crop insurance nationwide. Given that India’s largest insurance companies are all state-owned, this program could be launched quickly. Second, he should announce a big-ticket effort to upgrade irrigation throughout India, giving the program as much political weight as his "Make in India" manufacturing push.

The two states which have seen the highest growth in agricultural yields in the last decade -- Gujarat and Madhya Pradesh (both governed by Modi's Bharatiya Janata Party) -- have invested large amounts in extending irrigation networks. Multiple approaches can be adopted, from building canals to linking rivers, from installing pumps to draw groundwater to educating farmers on rainwater harvesting. Not all these measures would be a big drain on the exchequer.

Finally, Modi should use his bully pulpit to overcome the irrational resistance to field trials for genetically modified crops. Gujarat, Modi's home state, has already been a big beneficiary of Bt cotton, which lends itself to higher productivity and less waste than ordinary cotton. According to one recent independent study, farmers who planted Bt cotton between 2002 and 2008 earned 50 percent more profit than those using conventional seeds.

Modi's attempts to boost manufacturing and industry will take time to bear fruit. In the meantime, farmers need help. The challenge for Modi is to respond without compromising his equally important long-term goals for the economy.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Dhiraj Nayyar at dhiraj.nayyar@gmail.com

To contact the editor on this story:
Nisid Hajari at nhajari@bloomberg.net