More farm credit is meaningless

A Narayanamoorthy P Alli | Updated on January 11, 2018

Left in lurch: Indian farmers need long-term solutions - Photo: KK Mustafah

It will only further farmers’ indebtedness. Government must find sustainable ways to boost farm income and productivity

An enhanced allocation in farm credit — ₹10 lakh crore, against ₹9 lakh crore in FY17 — was one of the most impressive announcements in Budget 2017-18. This looks like a promising step towards fulfilling the Government’s objective of doubling farm income by 2022. This large budget allocation will help farmers to invest more and earn better profits in farm ventures.

That said, farmers’ organisations have expressed dissatisfaction over the announcement. The bulk of small and marginal farmers are not at all pleased with the move. They say such policies will never augment their income because credit is not a sufficient condition to harvest better profits in crop cultivation.

What are farmers expecting from the policymakers then? Do they need more credit when they are already indebted? Does more credit mean more debt for farmers?

More than credit

An unprecedented agitation by farmers’ groups has been hitting the headlines in recent years. Whether it is the silent crop holiday campaign by the paddy cultivators of Andhra Pradesh in 2011 or violent protests by the sugarcane farmers of Maharashtra in 2013, all that they have been demanding is a share of the proceeds that is commensurate with their efforts.

It is the demand for the right price for produce — and not for increase in farm credit — that has formed the core part of every agitation. However, there is overwhelming agreement across the political and economic spectrum that all such agrarian-related problems could be addressed by unclogging credit supply. A study by the Planning Commission indicates that except for enhanced credit, all other farm-related parameters have not grown proportionately. When credit is just a sub-component of inputs that goes into agriculture, how can more farm credit alone boost farm income or output?

The annual reports of the National Crime Records Bureau (NCRB) and results of the latest National Sample Survey Organisation reveal the dismal state of farmers. NCRB’s 47th annual report on accidental death and suicides in India shows that 11,772 farm suicides were reported across the country in 2013 alone. Its 49th annual report shows such suicides rose over 41 per cent in 2015 over 2014. The NSSO’s 59th survey revealed that about 48 per cent of agricultural households were indebted in 2003.

Almost a decade later, the NSSO’s 70th round survey underlined that in 2014 about 52 per cent of agricultural households are estimated to be in debt, confirming the worsening of farm indebtedness.

These reports cited poor remuneration from agricultural produce as the prime reason for increasing farm suicides and indebtedness. The Radhakrishna Committee on Agricultural Indebtedness (2007) and the National Commission on Farmers (2006) have also reiterated the same.

NSSO data show that farmer households earned only ₹101 per day from crops during 2012-13. When income from crops cultivation is so meagre, what will the farmers do with enhanced farm credit? How will they repay the debt? Why is the Government not able to understand the fundamental flaw in its move?

Rising cost of cultivation

High cultivation costs seem to be a major reason for poor farm earnings. Recent studies including that of the Commission for Agricultural Costs and Prices have emphatically stated that the cost of cultivation escalated almost four times during the first half of the current decade alone. To tackle this, the Government has been providing direct institutional credit to agriculture and allied sectors since 1970.

Although the data from the RBI’s Handbook of Statistics of Indian Economy show that direct institutional credit to agriculture and allied sectors rose from ₹818 crore in 1970-71 to ₹4.5 lakh crore in 2011-12, a higher amount of the credit has been supplied as indirect credit in recent years. For instance, of the total credit issued to agriculture during 1990-91, about 20 per cent was accounted for by indirect finance in the form of loans to companies that make farm inputs, State electricity boards, agribusiness companies, etc. This has increased to over 50 per cent during 2007-08 (data on this aspect is not released regularly). So, what is the consequence of such misdirected farm credit?

The Rangarajan Committee on Financial Inclusion (2008) observed that about 66 per cent of the marginal farmers preferred rural moneylenders over banks as the latter charge numerous fees, the cost of which often cancels whatever benefit they get on account of interest subsidy. The Report of the Task Force on Credit-Related Issues of Farmers (2009), too, categorically stated that the hegemony of moneylenders has been continuing even after the introduction of doubling of farm credit policy. When there is already a serious physical limitation to the delivery of farm credit, an additional farm credit makes no sense.

Stop working on the periphery

The reality is clear — farmers are not able to derive sufficient income to pay even the cost incurred on crop cultivation. Farmers can benefit only when income from agriculture takes care of input costs for which they take loans. Before embarking on enhancing farm credit further, the Government must correct the market imperfections that remain unaddressed till date.

No doubt, enhanced farm credit is needed to boost farm productivity, but if coupled with affordable farm inputs and a viable minimum support prices, it will indeed provide the desired results.

A prudent mix of required farm inputs especially through investing and popularising modern methods of irrigation (drip and sprinkler) can cut cultivation cost and boost productivity. Also needed are efforts to restructure MGNREGS by linking it with agriculture operations as it reportedly takes away the bulk of the agricultural labour force during the peak season, tightening the rural labour market.

The farmers’ outcry is also directed towards MSP, which is neither announced in advance nor is in tune with cultivation costs. Farmers will continue to cultivate only if their entire cost of cultivation is covered. Increased farm credit will only increase their indebtedness further, if arrangements are not made to increase the farm income sufficiently.

If policymakers start focusing seriously on these initiatives, the doubling of farm income will be guaranteed. That will take care of the needs of farmers’ families and leave them with a little surplus to sow the next crop.

Narayanamoorthy is Professor and Head, Department of Economics and Rural Development, Alagappa University and Alli is Assistant Professor, Department of Social Sciences, Vellore Institute of Technology

Published on May 02, 2017

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