Policy | Sixty years on, India still trying to get its agricultural credit act right

Farmers_Agriculture_Farming

Subir Roy

Easy availability of affordable credit is a key ingredient needed to build a modern and efficient agricultural sector. Unlike the central bank in any other country, the Reserve Bank of India has played a developmental role in helping deliver credit to the rural sector right from the early fifties and it is just out with a report on agricultural credit by an internal group.

Obviously the task at hand is an unfinished one. Indian agriculture has made notable gains in the post-independence decades so that the country is now self-sufficient in food and a net exporter for several commodities such as rice, marine products and cotton. However, capital formation in agriculture is low, credit flow is marked by high regional disparities and, perhaps most important, small and marginal farmers, tenant farmers, landless laborers and sharecroppers have to still substantially depend on the moneylender for credit. Hence rural deprivation remains high.

Overall, yield from farming is low in India and the pressure on land is enormous. Additionally, farmers most often get a poor price for their produce, as a result often falling behind in repaying loans. This leads to political demands for farm loan waivers which, when they come, damage the loan repayment culture, borrowers’ credit records and state government finances.

The report makes three sets of recommendations: one, how to improve credit reach; two, how to develop a cost effective and inclusive credit system; and three, how to improve credit discipline so you don’t need waivers. Plus, a chapter looks at the Chinese experience.

Perhaps the most important recommendation of the committee to take forward reforms, which will ease the flow of institutional agricultural credit, is to take the states on board. Legislative powers relating to agriculture remains with the states as it appears in the states list of the constitution. The report says: “In order to consult states and build consensus among them over reforms relating to agriculture there is a need for a federal institution, established on the principle of cooperative federalism, having representatives from both the Central government and the state governments. Such an institution exists in the form of the GST council which has been a success story.”

A key recommendation to improve the reach of institutional credit is to take forward the digitization of land records. This will help curb multiple loans being given against the same plot of land. Digitization will also remove the need to deal with physical documents and institutional lenders should be able to lend by creating online a lien on the land.

The land leasing system in the country should be reformed with the cooperation of the state governments (they have till now mostly been tardy on leasing) so that tenancies can be open and legal and not altered by landlords arbitrarily. This will give tenant farmers the confidence to invest in land improvement.

To make the delivery of agricultural credit more inclusive, the report recommends that state governments should promote consolidation of holdings so that farms reach a minimum size, enabling some economy of scale in operations. This will fetch returns which will facilitate ongoing investment to keep raising productivity. And the best way to help the marginalized farmer is not through the existing interest subvention schemes but through direct benefit transfer.

To simplify delivery of credit, kisan credit cards have been issued. In the last three years the number of these cards which are operational has fallen slightly even as outstandings on them have risen marginally. Despite the cards’ acceptability, only 10 per cent of households have valid cards. More work needs to be done on kisan credit cards to raise their usage as they are easy to operate and therefore help in inclusion.

A key reality of rural life is: no matter what is declared in the loan paperwork, agricultural families will divert crop loans upto a point for consumption, be it for a marriage or a health emergency. Hence the sensible suggestions that there should be a sanctioned limit for consumption loans and the ceiling for collateral free loans should be raised.

The report comes down heavily on farm loan waivers. These invariably produce dips in disbursement. When past loans are being waived, fresh ones are harder to come by. There is a need to be a bit methodical about waivers and try to link it to adverse weather conditions and periods of poor returns on farming. From the data presented, it seems that the poorest states have low levels of agricultural NPAs whereas states which extensively cultivate a cash crop like sugarcane – Maharashtra, Karnataka, UP – are high on NPAs. Sugarcane growers are not the poorest farmers but among the most vocal.

The recommendation in this regard is classically ambiguous. The central and state governments should do a “holistic" review of how agricultural policies work and how effective subsidies are. This should yield insights to “improve the overall viability of agriculture in a sustainable manner.” With such insights, agriculture should be put on a more viable footing and loan waivers should not be necessary.

Lastly, what can we learn from China where holdings are smaller than in India but productivity is much higher. China’s agricultural policy is based on long term (30 years) lease of land. Farm mechanization and modernization and use of high yielding seeds and R&D have improved the income of small farmers. Credit guarantee products offer credit at lower rates of interest and without margins. A database of poor people helps identify candidates for poverty alleviation programs. There is direct income transfer to farmers on per hectare basis and minimum support prices which are far higher than in India.

It seems India and China use the same bag of tricks but they work far better for China than India.

Subir Roy is a senior journalist and author. The views expressed are personal.