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Improvements in agri-credit system can revive agriculture

Institutional development across states should be a priority area for equitable flow of subsidised credit

Written by Bhupinder Singh Hooda |
Updated: February 14, 2022 10:29:17 pm
The budget speech as well as the Economic Survey 2021-22 recommended that priority should be given to crop diversification and allied sectors including horticulture, organic farming, dairying and fishing to increase farmers income. (Representational)

This budget has disappointed the farming sector. The government has increased the agricultural credit target to Rs 18 lakh crore for 2022-23 from Rs 16.5 lakh crore for the current fiscal, with an allocated subsidy of Rs 20,870 crore. The question, however, is: Is the huge credit and subsidy benefiting farmers on the ground?

The budget speech as well as the Economic Survey 2021-22 recommended that priority should be given to crop diversification and allied sectors including horticulture, organic farming, dairying and fishing to increase farmers income. But to enable small farmers to shift from wheat and paddy or improve their income through allied sectors, they must have access to institutional credit at reasonable rates of interest.

While the volume of credit has grown over the decades, its quality and impact on agriculture has deteriorated. Over the years, the growth rate in the agriculture sector has been falling: It was 6.8 per cent in 2016-17, whereas it is 3.9 per cent in 2021-22. Agricultural credit has become less efficient in delivering growth.

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In the last 10 years, agriculture credit increased by 350 per cent, but it has not reached even 15 per cent of the 12.56 crore small and marginal farmers. Credit is critical for achieving higher farm output. Institutional credit will help delink farmers from non-institutional sources, where they are compelled to borrow at usurious rates of interest.

The RBI has asked if agricultural households with the lowest landholding (up to two hectares) get only about 15 per cent of the subsidised loan from institutional sources. The share is 79 per cent for households belonging to the highest size class of land possessed (above 2 hectares). As per the Situation Assessment Survey of Agricultural Households by NSSO, the share of institutional loans increases with an increase in land possessed. Clearly, the bulk of subsidised agri-credit is grabbed by a handful of big farmers and agri-business companies.

A loose definition of agri-credit has led to the leakage of loans at subsidised rates to large agri-firms. For example, in 2017, 53 per cent of the agriculture credit that NABARD provided to Maharashtra was allocated to Mumbai metro city and suburbs, where there are no agriculturists, only agri-business.

One of the main reasons for this diversion is that subsidised credit disbursed at 4 per cent to 7 per cent rate interest is being refinanced to small farmers and in the open market at interest rates up to 24 per cent.

As chairman of the Working Group on Agriculture Production constituted in 2010 by the then prime minister Manmohan Singh, I had recommended strategies and action plans for increasing agriculture production and productivity, including long-term policies to ensure sustained growth. The report of the working group laid emphasis on the easy availability of institutional credit to farmers for future growth, recommending that “credit should be made available at not more than 4 per cent per annum rate of interest”. This was implemented by the UPA government throughout the country. However, in Haryana, the Congress government extended crop credit to farmers at a zero per cent rate of interest through state co-operatives.

I suggest the following changes in the agri-credit system. One, the flow of agricultural credit has not been uniform across states. Institutional development across states is a priority area for equitable flow of subsidised credit. Two, state governments should work in close coordination with the banking system for the promotion of more Joint Liability Groups (JLGs) as per NABARD guidelines to ensure that formal credit reaches financially-excluded farmers. Three, state governments should regularly monitor credit flow. Four, the rate of interest for long-term loans should be kept at 4 per cent. Five, a comprehensive list of all farm-related activities should be prepared by the banks in consultation with NABARD, agriculture experts, farmers and administration. Six, eligibility conditions/criteria for providing agriculture loans should be further simplified and liberalised. The repayment schedule should be according to the farmers’ capacity.

As chief minister of Haryana, I had amended the law to provide the recovery of the cooperative loans by leasing out the mortgaged land in place of selling, in the event of default by the farmer, with the mutual consent of cooperative society and the agriculturist. Not a single farmer was arrested in Haryana during my tenure for default in repayment of loans taken from cooperatives. The Haryana model on agri-credit introduced by a Congress government can be a blueprint for other states.

(The writer is former chief minister, Haryana)

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