Augment Institutional Finance and Credit for Agricultural Development in India
Agriculture remains a dominant sector of the Indian economy both in terms of contribution to gross domestic product (GDP) and a source of employment to millions across the country. More than 70 percent of the rural households depend on agriculture as their principal means of livelihood. Agriculture, along with fisheries and forestry, accounts for one-third of the nation’s GDP and is its single largest contributor. The total share of agriculture & allied sectors (including agriculture, livestock, forestry and fishery) in terms of percentage of GDP was 13.9 percent during 2013-14 at 2004-05 prices, as per the estimates of Central Statistics Office.
Agricultural exports constitute a fifth of the total exports of the country. In view of the predominant position of the agricultural sector, the Government of India during the budget 2014-15 took a number of steps for sustainable development of Agriculture. These include enhanced institutional credit to farmers; promotion of scientific warehousing infrastructure including cold storages and cold chains in the country; improved access to irrigation through Pradhan Mantri Krishi Sichayee Yojana; provision of Price Stabilisation Fund to mitigate price volatility in agricultural produce; mission mode scheme for Soil Health Card; setting up of a Agri-tech Infrastructure Fund for making farming competitive and profitable; provide institutional finance to joint farming groups of “Bhoomi Heen Kisan” through NABARD; and, development of indigenous cattle breeds and promoting inland fisheries and other non-farm activities to supplement the income of farmers.
Challenges Facing the Agricultural Sector in India
Indian agriculture has been facing multiple challenges for about two decades which have culminated in a severe crisis. No doubt, the two are intertwined but they call for independent attention. The agricultural development crisis reflected in reduced overall growth accompanied by declining productivity and profitability which has accentuated the general adversity in the livelihoods of small and marginal farmers; for the latter the root cause lies in high dependence of the population on agriculture and increasing marginalisation of land holdings. The subject becomes very relevant while dealing with agricultural credit as it forms the backdrop for answering many demand-side questions.
Rationale for Institutional Finance
In the pre-independence period, institutional finance for the agricultural and rural sector was necessary to overcome the sector’s problems resulting from weather instability and low incomes. While these are important reasons, there are several others common to early as well as later stages of agricultural development such as:
• Lack of simultaneity between the realisation of income and the act of expenditure;
• Weaknesses of informal lenders such as their resources being limited and ill-suited to modernise the rural sector, and perhaps the lenders’ exploitative nature;
• Increasing extent of monetisation.
The need for institutional finance for modernising the productive assets is greater as it may be the only way to improve productivity of land and/or labour. Modern financial institutions can, therefore, identify opportunities to lend, recover loans, and mobilise deposits even in the case of entrepreneurial farmers, besides others. These institutions can thus facilitate integration of financial markets across seasons, agri-entrepreneurs, and regions, and thereby achieve their three earlier mentioned goals.
In a detailed paper, Mohan (2006) examined the overall growth of agriculture and the role of institutional credit. Agreeing that the overall supply of credit to agriculture as a percentage of total disbursal of credit is going down, he argued that this should not be a cause for worry as the share of formal credit as a part of the agricultural GDP is growing. This establishes that while credit is increasing, it has not really made an impact on value of output figures which points out the limitations of credit.
In another study, Golait (2007) attempted to analyse the issues in agricultural credit in India. The analysis revealed that the credit delivery to the agriculture sector continues to be inadequate. It appeared that the banking system is still hesitant on various grounds to purvey credit to small and marginal farmers. It was suggested that concerted efforts were required to augment the flow of credit to agriculture, alongside exploring new innovations in product design and methods of delivery, through better use of technology and related processes. Facilitating credit through processors, input dealers, NGOs, etc, that were vertically integrated with the farmers, including through contract farming, for providing them critical inputs or processing their produce, could increase the credit flow to agriculture significantly.
The Government of India realises the importance of agriculture in the development of the country and hence has adopted several initiatives and programmes for this sector’s continuous growth. Prompted by the Government’s initiatives, there have been various investments in the Indian agricultural sector.
According to the Department of Industrial Policy and Promotion (DIPP), the Indian agricultural services and the agricultural machinery sectors have cumulatively attracted foreign direct investment (FDI) equity inflows to the tune of $2.15 billion in the period April 2000-December 2014.
Some of the major investments and developments in agriculture in the recent past are:
• IVRCL Ltd’s irrigation and water divisions have won orders worth `1,255.67 crore ($201.58 million). The company is based out of Hyderabad;
• The Oman India Joint Investment Fund (OIJIF), a joint venture (JV) between State Bank of India (SBI) and State General Reserve Fund (SGRF), has invested `95 crore ($15.25 million) in GSP Crop Science, a Gujarat-based agrochemicals company;
• Israel-based world’s seventh largest agrochemicals firm ADAMA Agrochemicals plans to invest at least $50 million in India over the next three years;
• Tafe Motors and Tractors Ltd has invested around $140 million by way of equity in the US-based AGCO Corporation, a worldwide manufacturer and distributor of agricultural equipment;
• Canada is keen to partner with India in the agriculture and processing sectors, particularly in pulses and canola.
Though the agriculture sector is vital for the Indian economy, finances to this critical domain are still not adequate. It appears that the banking system is still hesitant on various grounds to purvey credit to small and marginal farmers.
In fact, the institutional credit system has not been able to adequately penetrate the informal financial markets. The situation calls for concerted efforts to augment the flow of credit to agriculture, alongside exploring new innovations in product design and methods of delivery, through better use of technology and related processes.
The need of the hour is to make the institutional framework more participative through proper implementation of the existing policies so that the agriculture sector can be served like any other segment of the economy. It is necessary that all institutions should work together and complement each other.
Ministry of Commerce and Industry, Govt. of India
Sameer Abbas Zaidi is a Freelance Journalist.