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P. Devarajan

"A KEY challenge will be the financing of rural infrastructure," admits the RBI annual report and argues for "new approaches."

The current scenario is decidedly poor. Only about 40 per cent of the net cultivated area is irrigated; technology adoption is low owing to the "weak quality" of research effort and extension systems; only about 60 per cent of villages are connected by all-weather roads; rural markets are still inadequate and lead to delays in selling farm produce; 100 per cent village electrification is seen only in ten States with nearly 13 per cent of villages sans electricity; only about 75 per cent of the rural habitations has "full" access to drinking water and rural literacy is low.

Against this is the fact of banks over-reaching the 40 per cent priority sector target, facilitated by stretching the definition of priority sector to include even software.

There is an RIDF, run by Nabard (National Bank for Agriculture and Rural Development), which has done precious little despite a hefty corpus as State Governments find it hard to identify viable projects. Banks have to work out special agricultural credit plans in addition to the numerous Government-funded yojanas.

At present, a sub-target of 18 per cent of net bank credit weighs on the banking system and this target has not been met. Credit interventions by the banking system have made few studies of the links farmers have with traders offering high cost funds against standing crops which are appropriated at the lowest prices. There is no link between the prices the traders offer and earn and some of the best bankers admit to the banking system failing to clip the nexus.

A point made by the annual report is the switch from agriculture to agro-processing over the last few years. "With growing incidence of fragmentation, the consequent decline in the average size of land holding and subdued growth in yields, any further improvement in agricultural incomes will have to come from value addition through agro-processing or agro-based industries rather than agricultural production per se. Demand- based agricultural production may necessitate moving away from fiscal price supports in a phased manner towards greater exposure to international terms of trade and the development of alternatives such as futures trading which result in better price discovery and risk management. A crucial prerequisite is the removal of restrictions on the physical movement of major agricultural commodities and the integration of domestic agricultural markets, " says the annual report. Agreed. But how does, for instance, one reach futures prices to the farmgates?

It is not as if rural lending is a bad bet. The percentage of recovery to demand has moved up from 67.77 per cent in 1999 to 71.02 per cent in 2002 while the percentage of net bank credit for agriculture has hovered in the 15-16 per cent range.

The RBI has or should have on its files details on rural credit structure for it to come out with a detailed paper on the subject. For too long, debates on the financial system have been frenetically occupied by the nuances of corporate lending, forex and money markets.

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