The Hindu Business Line : Farm credit: Myth and reality

The annual growth rate of the farm sector has shown a steady decline. It’s not enough to set targets for credit disbursements. To support the desired GDP growth level of 8-9 per cent, the agri sector needs a more focussed approach.

S. S. Baskaran

Agricultural credit dispensation has been a vital financial intervention to make the farm sector a key contributor to national income and wealth creation. Advance estimates of the Government put the GDP growth for 2006-07 at 9.2 per cent. The compounded annual growth rate of the agricultural sector has fallen steadily. It averaged 4 per cent per annum during the 1980s, 3.2 per cent during the 1990s and 2 per cent so far during the 2000s.

The rainfall during 2006 South-West monsoon season (June-September) was reported to be close to normal. This resulted in a comfortable reservoir position auguring well for the rabi crops. Cumulative rainfall during North-East monsoon season (October-December) was, however, 21 per cent below normal as compared to 10 per cent above normal during the corresponding previous period.

Govt measures

Among others, the Government in mid-2004 announced a credit package which proposed to double the flow of credit to agriculture in three years.

Accordingly, the Reserve Bank of India directed all lending institutions to step up farm credit estimating an increase of 30 per cent over the Rs 80,000 crore of 2003- 04 to Rs 1,05,000 during 2004-05; the break-up being commercial banks: Rs 57,000 crore, regional rural banks Rs 8,500 crore and co-operative banks Rs 39,000 crore.

The Finance Minister during the Budget speech for 2007-08 sounded confident of reaching the farm credit target of Rs 175,000 crore for 2006-07. It was reported that during 2006-07, 53.37 lakh new farmers were brought into the institutional credit system up to December 2006.

The disbursements both under crop loan and investment credit by a bank or credit institution are included for achievements of the target. Under crop loans, disbursements are made at the beginning of the season by way of renewals in a majority of cases.

Additional areas may not come under the plough regularly; however, additional finance to meet the genuine requirements of the borrowers, is given at the time of renewal.

The real picture

The real growth in agriculture credit cannot be measured on account of the following reasons.

Under kharif/rabi financing, a majority of disbursements is by way of renewals. The lending institution may increase the quantum of finance depending upon the rise in the cost of inputs etc.

Jewel loans are normally included at the branch level under agricultural disbursements, though the end-use in a majority of cases is not strictly known. Consumption loans may also come under this category.

Banks generally include takeover loans under this category, though the transferee bank also might have already taken them under disbursements. This may result in duplication.

Effectively, addition of new farmers is not taking place on a massive scale due to lack of inclusion of additional areas under cultivation. It can be seen that real growth in farm production has not happened during the past two or three years, though financing institutions and the RBI may be satisfied with the disbursement level. The addition of 53.37 lakh new farmers needs to be analysed.

Statistics on agricultural production brought out by the Government, shown in the Table, are revealing.

As against the normal area of 99.8 m. ha (million hectares) for kharif cultivation, 100.00 m. ha were brought under cultivation during 2005-06. Similarly, under rabi cultivation, as against 56.5 m. ha, 63.9 m. ha. were covered.

The area for kharif season was down by 1.9 m. ha. and for rabi season, up by 1.3 m. ha. As compared to that in the previous fiscal. This reveals that there is no significant increase in the area under cultivation over the years.

To sustain/support the desired GDP growth level of 8-9 per cent, the agri sector needs a greater thrust, with appropriate measures calibrated to reach out to more and more of the farming community, encouraging them to adopt new techniques such as contract farming with appropriate linkages in the real sense rather than feeling euphoric about/complacent with the existing practices and levels of disbursements.

Unless this happens, the sectoral contribution of agriculture to the GDP can only remain a myth.

(The author is a former General Manager, Canara Bank.)