Chapter-I: Introduction and Review of Literature
1.3: Agriculture Production in India
1.5.10: Credit Availability
formation in agriculture continued to be the lowest among all sectors (Reddy, 2012).
This poor investment in agriculture is one of the main causes of slow growth in agriculture in recent years. Gulati and Bathla (2002) have estimated that a 10 percent decrease in public investment leads to 2.4 percent annual reduction in agricultural GDP growth.
However, this trend has since been arrested and the share of capital formation of the agriculture and allied sectors in GDP has increased from 14.1 percent in 2004-05 to 21.2 percent in 2012-13(at 2004-05 prices) (Economic Survey, 2012-13, 2014-15).
Table-1.13: Investment Growth Rates in Agriculture in India at 2004-05 prices :(in percent per annum) Year/GR 2001-02 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Growth
Rate
6.9 6.6 13.9 5.9 15.9 21.4 8.2 8.4
Source: Economic Survey, 2011-12
The annual growth rate of investment in Indian agriculture observed high fluctuation from 2001-02 to 2010-11. Investment growth rate in agriculture increased surprisingly to 21.4 percent in 2008-09 but fell in succeeding years.
We conclude that the capital formation in the farm sector in India is not upto the mark as of its importance in Indian economy. There is a widespread belief that inadequate and declining quantum of investment expenditures in agriculture is a major reason for the sluggish and decelerating growth in this sector (Vaidyanathan, 2010).
available to farmers in adequate amount and at appropriate costs (Sadhu and Singh, 1975).6
“The lesson of universal agrarian history from Rome to Scotland is that an essential of agriculture is credit. Neither the condition of the country nor the nature of the country nor the nature of the land tenures, nor the positions of the agriculture, affect the one great fact that agriculturist must borrow”.7
The emergence of Green Revolution and introduction of new technology in agriculture has led the increasing demand for disbursing credit to most of the farmers.
Agriculturecredit, in a practical sense, is a nucleus of the system of farm operation. In poor a state like Assam, agricultural credit assumes even greater importance (Dey and Rakshit, 2003). Traditionally, farmers depended for their credit needs on local moneylenders, friends and relatives, local merchants and commission agents. Increasing dependency on informal sources of credit by rural households from 1991 onwards is a cause of concern (Tripathy, 2015). NSSO estimated that about 52 percent of the agricultural households in the country were estimated to be indebted, of which 61 percent had operational holdings below one hectare, 57.7 percent of the outstanding amount was sourced from institutional channels and rest 42.3 percent from money lenders, traders, relatives and friends. The average amount of outstanding loan per agricultural household was Rs. 47000 (approx.) (NSS 70th Round, 2013). Studies conducted by the RBI and NABARD indicate that the crop loans are not reaching intended beneficiaries and there are no systems and procedures in place at several bank branches to monitor the end-use of funds. Although overall credit flow to the agriculture sector has increased over the years, the share of long-term credit in agriculture declined from 55 percent in 2006-07 to 39 percent in 2011-12. According to NSSO 70th Round Report, as much as 40 percent of the finances of farmers still come from informal sources, despite an increase in the flow of institutional credit to agriculture in recent years. The share of institutional credit in the total credit availed by the farm households increased significantly over time from 31.7 percent in 1971 to 61.1 percent in 2002 (Subbarao, 2012). But in the race between the supply of formal credit and the demand for capital on farms, the former lagged behind, leaving a big gap to be filled by high-cost
6 Sengupta and Roy (2003), p.193
7 Nicholson, F. A., Report regarding the possibility of introducing land and agricultural bank in the Madras Presidency, Vol. I, p. 46.
alternatives such as private money lenders, dealers, microfinance institutions, etc.
(Satyasai, 2012). Usurious money lenders account for a 26 percent share of total agricultural credit (Economic Survey, 2014-15). Marginal land holding households suffered the most with only 15 percent of their credit being sourced from institutional sources (NSSO, 2006). The latest All India Debt and Investment Survey have shown that non-institutional financial agencies accounted for as much as 44 percent of the outstanding credit in 2012-13 (Hoda and Tewary, 2015).
Direct agriculture credit has significant positive impact on agriculture output. In particular, change in per capita agriculture direct credit by one percent will lead to increase in per capita agriculture output by 0.11 percent (Das et al., 2009). Direct finance to cultivators has increased from 72.6 percent in 1975-76 to 82.4 percent in 2011-12 (Tripathy, 2015) (see appendix Tables I.4, I.5).
With the recommendation of the Narasimham Committee on the liberalization of financial system, banks were to be permitted to close rural branches, in the name of rationalization of branch networks. As a result, growth in credit to agriculture declined from 6.8 percent in the 1980s to only 2.6 percent in the 1990s. However, Rangarajan (2009) said since 1991-92 there has been fairly rapid expansion of credit to agriculture.
Between 2002 and 2011, agricultural credit grew by 17.6 percent per annum, but there is little evidence to argue that the major beneficiaries of the revival in agricultural credit in the 2000s have been the small and marginal farmers (Ramakumar, 2014). In the whole process small and marginal farmers are usually left out of the purview of formal credit (Satyasai, 2012) or they are often not accessible due to lack of required collateral. There is a wide gap between the loan accounts and credit disbursal to small and marginal farmers and big farmers during 1985-86 to 2011-12. During 2011-12, 77.8 percent of loan accounts of small and marginal farmer received 63.5 percent of total disbursed credit whereas 22.2 percent of loan accounts belonging to the large farmer obtained 36.5 percent of total loan amount disbursed (Tripathy, 2015). The small and marginal farmers who have borrowed from money lenders, normally at the rate of 36 percent per annum, are committing suicide in large numbers all over the country (Datt and Mahajan, 2013).
In post reform era, there has been indifference in extending credit to agriculture. It is very clear that during the period commencing from 1993, the loaning to agriculture sector has been neglected (Vaidyanathan, 2010). Table 1.14 shows the proportion of operational holdings of different size groups availing institutional credit.
Table-1.14: Proportion of operational holdings availing institutional credit, farm-size-wise at all India level from 1981-82 to 2006-07:
Operational holdings size- group
Proportion of operational holdings availing institutional credit (in %) Increment in 2006-07 over 2001-02 (in %) 1981-82 1986-87 1991-92 1996-97 2001-02 2006-07
Marginal 17.53 14.78 15.68 9.50 14.02 19.6 4.6
Small 27.42 24.12 17.90 17.63 27.74 32.8 5.0
Semi-medium 31.03 29.27 21.53 19.90 31.57 34.5 3.0
Medium 33.24 30.16 22.45 23.10 33.13 39.4 6.3
Large 33.19 29.40 22.49 23.04 29.38 40.1 10.6
Overall 23.09 20.10 17.53 13.41 20.24 25.0 4.75
Source: Satyasai, (2012). Access to Rural Credit and Input Use: An Empirical Study, Agricultural Economic Research Review, Vol.25 (Conference Number) pp. 461- 471.
Institutional credit to overall operational holdings has decreased from 23.1 percent in 1981-82 to 13.4 percent in 1996-97 while gradually improvement is seen and after a decade it reached to 25 percent. Proportion of marginal land holdings availing institutional credit is all along lower than other size of land holdings from 1981-82 to 2006-07.
Innovative credit products were introduced during post-liberalization period with a view to improving the reach of institutional credit. The self-help groups (SHGs)-bank linkage programme launched in 1993-94 for providing micro-finance to the rural poor, the Kisan Credit Card (KCC) scheme are introduced as a step towards simplifying the procedure for timely and adequate short term institutional credit to farmers. Number of KCCs issue increased from 24.31 million in 2010 to 39.9 million in 2014. And the loan amount disbursed from 1240.1 billion at the end of March, 2010 to 3684.5 billion at the end of March 2014 (RBI, Annual Report, 2013-14).
It is also observed that the credit absorbing capacity of the farmers is increasing due to modernization and commercialization of agriculture, which necessitates constant assessment and balancing of demand in relation to productivity, costs, prices and margins. However, credit worthiness of the purpose, the actual production needs, the incremental income and repaying capacity of the farmers may play an important role in determining to whom and how credit should be given.