GS3: agricultural produce and issues and related constraints
What is the issue?
- Recently, there is an intense discussion on the strategies needed for addressing farmer distress in India. Among others, assured and greater access to institutional credit has been proposed as a way forward.
- The politicians believe that the removal of credit constraints is necessary to improve farmer welfare and support agricultural growth.
- But, the academic studies state that in India, the correlation between the institutional agriculture credit and the agricultural growth is weak.
- And no enough attention is given to a key policy question – Whether agriculture credit of such size contributes commensurately to agricultural growth.
- Reason to measure it – To assess the productivity of institutional credit to the agriculture sector.
- Credit intensity of Agriculture sector = Agricultural credit /
- There is a striking increase in the ratio of agricultural credit to agricultural GVA since 2005-06.
- This reveals that the agricultural credit intensity has increased tremendously over the years.
- Calculating agricultural credit implies that it has become less efficient in delivering agricultural growth.
Consequences of rural indebtedness
- Rural indebtedness is also likely to have some undesirable social consequences. Due to ever-growing debt there emerges in the rural economy of India a class of landless labourers and tenants.
- Consequently independent or self-sufficient farmers gradually lose their identity.
- The landless workers have nothing to offer as security in order to obtain loans from moneylenders, except their labour power.
- the acquisition of land by the traders and moneylenders and the consequent deprivation of the poor farmers of their meager landed property was the root cause of the Naxalite movement.
RBI on Agricultural credits
- RBI’s study: There is no statistically significant causal relationship between agricultural growth and credit cycles in India.
- Seminal study using State-level data:
- Agricultural credit plays a role in influencing the purchase of agricultural inputs by farmers.
- But it has a weak impact on agricultural GDP.
- Instead, the performance of agricultural GDP is determined by sectoral composition, output prices, the area under irrigation and public expenditure.
- Studies suggest that there is a weak relationship between the flow of institutional credit to the agriculture sector and agricultural growth in the Indian context.
- The ability of credit to induce agricultural GDP growth is limited.
- Adequate attention should be given to building other capabilities or non-credit growth ingredients required to promote agricultural growth.
- Emphasises the need for proper targeting of agricultural credit to achieve the desired impact on agricultural growth.
What is the current scenario?
- A substantial part of subsidised agricultural loans has been diverted for non-agricultural purposes.
- Categorisation of gold loans as farm credit by banks adds to the problem because such loans are mostly used for consumption purposes.
- No concrete actions by RBI to ensure proper use of agricultural credit are not forthcoming even though it investigated the diversion of farm loans for non-agricultural uses.
- A notification issued by the RBI in this regard to public sector banks had advised the latter to ensure that all farm loans meet certain criteria.
Advantages of farm credits
- Institutional credit will lead to the increase in cropping intensity, irrigated area and particularly labour intensive high yield verities of crops.
- Previous efforts to infuse farm credits show a positive production output in the agricultural economy.
- Increased agricultural activities led to the increased income for the agriculture labours not necessarily to the farmers.
- It also helps to avoid the local money lenders and thereby end the debt trap.
Disadvantages of Farm credit
- It needs to be recognised that credit schemes for agriculture are not scientifically designed.
- Further, as institutional lenders withdraw from the area, after a loan waiver, borrowers are pushed to high-cost unorganised channels, like moneylenders.
- Also, given the life-cycle and shelf life of crops, in the absence of warehouses and agro-processing units, price and market insurance is completely absent.
Farm loan waiver pros and cons
- States’ debt-to-GSDP ratio will worsen by average 4 percentage points if all states waive off 50% of farm debt.
- Farm loan waivers will increase states’ interest payments.
- NPAs (non-performing assets) in agriculture rose quickly after the large-scale debt waiver in 2008.
- Such waivers are unlikely to help the cause of either distressed farmers or troubled banks over the long run.
- And they may well impair the quality of public spending by states, as the central bank fears.
Non-credit growth ingredients or capabilities:
- Productivity increases,
- expansion of infrastructure,
- higher public expenditure on agriculture and allied services,
- effective extension services,
- sound institutions,
- export competitiveness.
- Gross Domestic Product (GDP):
- Gross Domestic Product (GDP) is a broad measurement of a nation’s overall economic activity.
- It is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.
- It is calculated within a domestic territory which in layman terms may mean political frontiers of a country.
- It includes all private and public consumption, government outlays, investments, additions to private inventories, paid-in construction costs and the foreign balance of trade.
- Ensure crop insurance penetration across the country and extend reach of minimum support price, which has, for too long, been dedicated to few crops and in a narrow geographical area.
- The agro-processing industry and warehousing needs to expand so that agricultural produce can be stored when prices plunge.
- Credit products for agriculture need to be tailor-made based on cropping and rain cycle, specific to a particular region. The regional offices of commercial banks should contribute in this exercise.
- The period of crop loan should be extendable to four years, given that, on average, every second or third year the spatial distribution of rain pattern is erratic in India.
- Monitoring of agricultural credit utilisation at the ground level is the need of the time.
- The RBI and commercial banks are aware of the ground reality.
- Actions should be taken to ensure proper use of agricultural credit by ensuring that the loan is used for the stated purpose.
- Public Sector Banks (PSBs) to ensure that all farm loans meet certain criteria as per RBI’s notification to PSBs
- Limiting the disbursement of farm loans only to an agriculturist,
- Ensuring that the loan is used for the stated purpose,
- Verifying that disbursal and recovery of farm loans follow seasonality pattern.
- To a larger extent, these tasks could be carried out using technology such as analytic software, which is made possible today as all major banks in India follow the Core Banking Solution system.
- Since the problem of rural indebtedness has two major dimensions, to solve the problem we have to adopt a two-fold strategy.
- Since the magnitude of debt is quite high, steps may be taken to cancel old debts. There is a strong case for reduction of ancestral debt and even for their liquidation.
- There is a growing demand to treat farm loans in a similar way as loans to industry. Do you think that such an approach will help to solve agricultural credit issues and financial stress on Banks? (200 words)