Agriculture Finance:Status in India

Agriculture plays a significant role in the Indian economy and provides employment and livelihood to a large section of the Indian population. Approximately 44% (as per ILO estimate of 2018) of the working population is employed in agriculture and allied sector. However, the contribution of agriculture to GDP has been declining from 52% in the 1950s to 30% in the 1990s and further below 20% from 2010 onwards as per data from Ministry of Statistics and Programme Implementation (MoSPI). In 2018-19, the share of Agriculture & Allied Gross Value Added (GVA) in overall GVA was 16% (Ministry of Agriculture and Farmers’ Welfare (MoA&FW) Annual Report 2018-19). 

Economic Survey 2018-19 suggests that the growth rate in GVA (at 2011-12 prices) over past five-six years has been higher for livestocks, fishing and aquaculture as compared to crops.Allied activities contribute approximately 40% to agricultural output, whereas only 6-7% of agricultural credit flows towards allied activities. 

One important characteristic of Indian agriculture is that it is mainly small holders’ farming with an average landholding size of 1.08 hectares. The small and marginal farmers account for 86 per cent of all holdings and 47 percent of the operated area.They contribute more than 50% of the total agricultural and allied output. In smallholder farming, it remains a challenge to raise agricultural productivity and farmers’ incomes. It requires appropriate solutions starting with easy access to modern inputs and then selling the produce in most remunerative markets. Institutional credit at reasonable cost all along the value chain is one such catalytic instrument that can facilitate the process by converting many subsistence farmers into vibrant commercial farmers. They can then diversify their agricultural operations in growing high value crops like fruits and vegetables, and engage in allied activities, like dairy, poultry, fishery, honey, beekeeping, etc. Allied has huge potential, which can be capitalised by improving credit flow towards it and by encouraging farmers to move towards allied activities.

What has been the role of institutional credit in Indian agriculture?

 Banks in India have made commendable progress in terms of scale and outreach of formal credit to the agriculture sector. From ₹31.71 billion in 1981, the outstanding advances to agriculture and allied activities have grown significantly to ₹13694.56 billion in 2017-18 (16 per cent of total bank credit). The long-term trend in institutional agricultural credit revealed that over time, significant progress has been achieved in terms of scale. Agricultural credit as a percentage to Agriculture GDP increased from 10% in 1970s to 52% by 2018, which shows that banks have made significant progress in lending to agriculture. In India, scheduled commercial banks (79%) are the major players in supplying credit to agriculture sector followed by rural cooperative banks (15%), regional rural banks (5%) and micro finance institutions (1%). Small finance banks set up with the objective of deepening financial inclusion have started their operations recently. They would be catering to small and marginal farmers, low income households, small businesses and other unorganised entities.

Challenges in agriculture financing:

Despite the impressive growth in formal agricultural credit, there are still several challenges that need to be tackled. 

Data on the average loan taken by agricultural households, as per the NABARD’s Financial Inclusion Survey Report 2016-17, indicated that 72% of the credit requirement was met from institutional sources and 28% from non-institutional sources. 

The report further states that out of the total agricultural households, approximately 30 percent still avail credit from non-institutional sources. 

The problem of financial exclusion gets aggravated due to lack of legal framework for landless cultivators as the absence of documentary evidence becomes a major hindrance for extending credit to this segment of the farming community, who take up cultivation work on oral lease. 

Further, the analysis of state wise flow of institutional agricultural credit has revealed uneven distribution of credit amongst states compared to their corresponding share in overall output. To a certain extent, such regional disparity is on account of variation in credit absorption capacity of these regions. Funds like Rural Infrastructure Development Fund (RIDF) have been created out of priority sector lending shortfall of banks and established with NABARD with the underlying philosophy of lending to state governments to facilitate creation of enabling rural infrastructure to deepen the credit absorption capacity in rural areas.

 An analysis of sanctions from RIDF indicates that states with higher credit flow made higher demands for resources under the fund. 

On the contrary, states with lower credit flow were lagging in borrowing funds from RIDF. 

Thus, the least developed states which are already credit starved are getting lower share of funds from the RIDF. 

This highlights the need to break this vicious cycle and think of certain measures by which funds can be earmarked to the most backward/ credit starved regions to ensure speedier development of the most backward areas in the country. 

These issues and challenges impinge on the efficiency, inclusiveness and sustainability of the agricultural credit system, which is a matter of concern.

Internal Working Group set up by RBI 

Considering this, RBI had set up an Internal Working Group (IWG) in February 2019, to understand the issues and recommend workable solutions to address the constraints. The IWG based on extensive data analysis and research held extensive consultations and deliberations with experts and practitioners in the field and submitted its report in September 2019.

The recommendations of the IWG include building up of 

1)an enabling ecosystem through digitisation of land records, 

2)reforming of land leasing framework,

3) creation of a national level agency to build consensus among the state governments and central government with regard to agriculture-related policy reforms and

4) innovative digital solutions to bridge the information gap between the banks and farmers for expediting the credit delivery process.

5) Other policy interventions recommended are- suitable modifications in the Priority Sector Lending guidelines applicable to all banks and strengthening of credit delivery channels through Kisan Credit Cards, Self-Help Group Bank Linkage Programme, Farmer Producers Organisations, in a manner to make them more effective and efficient in ensuring credit flow to the credit starved regions of the country, as also to the excluded segments of the farming community. RBI would be initiating necessary steps for implementing these recommendations as these would go a long way in ensuring the long-term sustainability and viability of the Indian agriculture sector. 

Technology - A key driver for sustainable agriculture

 Technology has powered Indian agriculture time and again by helping overcome productivity stagnation, strengthening market linkages, and enhancing farm management. Globally, it has been established that technology adoption modernizes farmers’ production practices and leads to uniform annual returns for farmers, reduced risk of crop failure, and increased yields. Hence, at the macro level, the agricultural development policies should focus on leveraging technology with the goals of (i) achieving high growth by raising productivity (ii) inclusiveness by improving coverage of lagging regions, small and marginal farmers, landless/tenant/oral lessee and women farmers, and (iii) sustainability of agriculture.I

  New age technological solutions in the form of product, service or application by agri-start-ups can build up a smart agriculture value chain that will enhance the sustainability of agriculture. Agri-start-ups may focus on some key areas such as supply chain, infrastructure development, finance related solutions, farm data analytics and information platforms. agri-start-ups can succeed and can be scaled up only in a conducive ecosystem, which is possible if agri-business industry comes forward and deepens its engagement with agri-start-ups.

Today India in a  position of food surplus country and a net exporter of many agriculture and allied products. This requires the government policies related to agriculture to be shifted from that of managing food scarcity to managing food surplus. Today, agriculture in India faces an even more demanding challenge: to grow agri-produce sustainably, inclusively and responsibly. This can be achieved when all the stakeholders align their policies and actions towards the SDGs. As far as financing of agriculture is concerned, going forward, banks will have to integrate ‘sustainability’ into their business strategy and decision-making processes in order to support environmentally responsible and sustainable projects in the agriculture sector. For this, banks will have to undertake innovative agricultural financing models so that environment friendly and sustainable projects can be supported. With this, I conclude and wish you all the best.