India’s agricultural sector remains the backbone of its economy, supporting nearly 42.3% of the population and contributing 18.2% to the GDP. However, productivity gaps in agriculture not only pose an economic challenge but also impact the livelihoods of millions dependent on farming. Low-income levels in agriculture exacerbate income inequality, increase urban migration, and strain infrastructure. Addressing these gaps is both an economic and social necessity, with policies aimed at boosting agricultural productivity serving as a solution to sustainable urban growth and rural prosperity.
Agriculture is also central to India’s food processing industry, which is growing at a CAGR of 10.8%. Improving agricultural productivity and integrating credit systems is crucial to increasing agricultural exports and achieving India’s trade ambitions. Hence, addressing productivity at the ground level is key to sustaining economic growth and ensuring rural prosperity.
Credit Flow into Agriculture – Trends and Challenges
Agriculture experienced robust credit growth of 19.7% YoY in FY24, bolstered by schemes like the Kisan Credit Card (KCC) and Pradhan Mantri Fasal Bima Yojana (PMFBY). Despite this, the sector is hindered by systemic inefficiencies. The Gross Value Added (GVA) of agriculture was 17.7% of the economy, compared to higher returns in industry and services, which highlights the need for improved agricultural credit efficiency. While agriculture’s output per unit credit remains modest at ₹1.10, industrial and services sectors show much higher returns, at ₹1.21 and ₹3.30, respectively.
| Sector | Credit Growth (%) | GVA Share (%) | Output per Unit Credit (₹) |
| Agriculture | 19.7 | 17.7 | 1.10 |
| Industry | 8.5 | 27.6 | 1.21 |
| Services | 23.2 | 54.7 | 3.30 |
Despite some growth in credit flow, nearly one-third of farmers still face barriers to accessing formal credit. Tenant farming further complicates this, as landowners often migrate to urban areas, leaving tenant farmers without formal tenancy agreements, thus excluding them from essential resources like credit and subsidies. Formalising tenancy arrangements is crucial for enhancing agricultural efficiency and supporting these farmers.
Without formal ownership, tenant farmers remain dependent on informal lenders, facing higher borrowing costs and limited access to modern farming techniques, reducing agricultural output quality and quantity. This informality creates bottlenecks in supply chains and limits India’s export competitiveness in the global food market.
Key Challenges Hindering Agricultural Credit Efficiency
The informality in tenancy arrangements restricts tenant farmers' access to credit, government schemes, and modern farming techniques. Formalising tenancy agreements through legal templates, like The Model Agricultural Land Leasing Act (2016), and linking them to land ownership records would allow tenant farmers access to the resources they need for productivity enhancement.
Another major challenge is the lack of price stability in agriculture, which undermines farm income stability. Unlike other sectors, farmers face unhedged risks from price volatility due to the absence of financial instruments like put options or futures contracts. Introducing bank-issued put options with premiums funded initially by the government can help stabilise incomes, with the cost gradually absorbed by farmers over time. Transparent price discovery mechanisms through market forces would ensure fair pricing for these instruments.
The integration of agricultural credit with insurance schemes also needs improvement. While the PMFBY covers crop losses, it does not protect lenders, discouraging credit expansion. A lien-based system that ties insurance payouts to financial service providers (FSPs) could mitigate default risks and boost credit flow.
Policy Recommendations to Enhance Credit and Productivity
To address these challenges, three critical reforms are proposed:
1. Formalising Tenancy Arrangements: Institutionalising tenancy arrangements through legal templates under the Indian Contract Act and state-level Tenancy Authorities will integrate tenant farmers into formal systems. Registered tenancy agreements would grant tenant farmers access to credit, subsidies, and schemes that could significantly improve productivity. Such formalisation will incentivise tenants to invest in modern farming techniques, raising overall productivity levels.
2. Price Stabilisation Mechanisms: Stable incomes are essential for sustained investments and growth. Introducing put options underwritten by banks, with initial premiums funded by the government, would hedge against price risks. Over time, as farmers become financially literate, they could gradually absorb the costs of these contracts, making the system self-sustaining. Transparent pricing mechanisms for these financial products would ensure fair market prices for farmers.
3. Agricultural Credit and Insurance Linkages: Linking agricultural credit with insurance schemes through a lien-based system will reduce default risks, encouraging lenders to expand credit. The ongoing digitisation efforts through India’s Agri Stack can streamline agricultural services and extend insurance coverage to tenant farmers. Strengthening connections between financial institutions and crop insurance schemes will create a more resilient agricultural credit ecosystem, akin to the credit guarantee models used for MSMEs.
Unlocking Potential through Structural Reforms
India’s agricultural sector lags behind in credit efficiency, which hampers growth. Structural reforms focusing on formalising tenancy arrangements, stabilising prices, and linking credit with insurance mechanisms are essential for unlocking higher credit flows and boosting productivity. Aligning agricultural credit policies with the MSME model, leveraging insurance frameworks to secure lenders, and creating price stabilisation tools will transform Indian agriculture into a competitive, sustainable industry.
Investing in infrastructure, expanding digitisation, and integrating tenant farmers into formal systems will provide long-term growth for the sector. These efforts will ensure India’s global competitiveness in food exports and secure its position as a leading food supplier.
Bold reforms are needed to elevate Indian agriculture and realise its full economic potential. Addressing credit inefficiencies, formalising tenant farming, introducing price stabilisation mechanisms, and linking credit with insurance schemes will unlock growth and ensure a prosperous future for the sector and the country.
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