Agriculture is the process in which land is used to grow a variety of crops. It also includes breeding and raising livestock as well as poultry and aquaculture. It forms the backbone of Indian economy as more than 50% of the population is dependent on agriculture and its related activities. It has a significant contribution in the nation’s GDP as well. India is also known as an agrarian country due to its dependence on agriculture.
Agricultural finance is needed to meet various demands like need for good quality seeds, supply of power, procurement of fertilisers, agricultural marketing, post harvesting storage and transport of produce, meeting the risks like damage due to pests, diseases and issues like low rainfall etc. In India, both institutional and non-institutional means of finance exist. There are several issues that affect both the segments like complicated procedure, frequently changing norms, high interest rates etc.
In India, agriculture has been practiced since the ancient times. Agriculture has evolved to a great extent over the time and more so after independence. A variety of reforms including land reforms, subsidies by the government, other types of financial assistance etc. have been introduced in the sector. Agriculture is dependent on several factors like land availability, type of soil, climatic conditions etc. There are certain other vital factors that affect agriculture like availability of power, availability of fertilizers and availability of finance.
Agricultural finance refers to the various inputs in the form of funds in the agricultural sector. Improving the productivity, procuring fertilizers and other farming tools and equipments, funding the various activities like storage and transportation etc. are some of the important segments where financing and funds are needed. Another crucial segment is that of insurance. In India agriculture is majorly dependent on rainfall. However, due to erratic nature of rainfall, the produce from agricultural sector varies to a great extent. In such a scenario, it becomes vital that proper insurance facilities are available for the farmers in order to deal with the financial crisis that may follow the poor production. Agricultural finance is important in an agrarian nation like India because of its major role in eliminating the constraints to invest in farming activities, procurement of better seeds and fertilizers in order to increase productivity and for improving the technology. There are certain other factors like risk management, addressing the fluctuating market conditions and unstable prices in the market etc. that call for effective agricultural financing.
Current Situation of Finance in Agricultural Sector in India
Indian agricultural sector is characterized by instability due to the effect of a number of risks involved. India’s expanding population and over dependence on agriculture, predominance of small and marginal land holdings, low chances of bargaining due to less produce, various crop diseases, changing climatic conditions, lack of proper irrigation facilities, and unavailability of power, uncertain policies, existing debts on the farmers are some of the factors that have been affecting the agricultural sector.
The erratic nature of demand and supply also affects agriculture. Improper storage facilities lead to loss of produce thereby causing financial loss. Indian agriculture has had the issue of lack of adequate storage facilities since a long time. Lack of adequate investment in building new storage facilities and developing the existing ones has results in loss of huge quantities of agricultural produce every year. In India, the finance in agricultural sector consists of different arms like institutional bodies (RBI, NABARD, Co-operative banks etc.), non- institutional players like money lenders, traders etc. and the government. The institutional sources along with the government, give financial credit to farmers to account for activities like repaying debts, procuring seeds, fertilizers etc. Different state governments also have individual financing policies that include free power supply schemes for farmers like in Karnataka, direct benefit transfer by different states etc.
Non-institutional sources of finance like money lenders, landlords, traders, commission agents etc. also exist in the agricultural framework. A major issue related to such sources is the debt trap that the farmers fall into after acquiring loans from these sources. Money lenders, landlords etc. give loans at higher interest rates to the farmer, further, they work with a profit motive and due to this reason they turn blind eye for issues like erratic rainfall and other such factors that adversely affect agricultural productivity. Subsequently, in case of low produce in certain years, the farmers are unable to repay the loans and enter into a never-ending debt trap. Debts thus incurred tend to accumulate over time and are transferred from generation to generation. This leads to poor economic condition of farmers and in extreme cases forces them to commit suicide. Indian agriculture is also supported by Foreign Direct Investments. The share of FDIs in the agricultural sector has been increasing over the years. As per, Department for Promotion of Industry and Internal Trade (DPIIT), “the Indian food processing industry has cumulatively attracted Foreign Direct Investment (FDI) equity inflow of about US$ 9.98 billion between April 2000 and March 2020”.
Indian government introduced the MSP policy during 1960s for wheat. Gradually MSP has spread to different variety of crops. MSP or Minimum Support Price serves as an insurance for famers in case of any sharp fall in prices of crops. Government declares a price for crop in the beginning of sowing season and if the farmers fail to sell their bumper produce then government procures it from them at MSP and stores it. MSP serves two purposes; it aids the farmers financially in an event of falling prices of produce and it helps the government to procure products for public distribution. In India, institutional financing bodies are also present to aid and assist the farmers financially. Co-operatives, RBI, NABARD, Non-Banking Finance Company – Micro Finance Institutions, RRBs etc. are some of the institutions that help the farmers by providing agricultural credits. The nationalization of commercial banks in 1969 (to give rural credit and meet the expanding demand in agriculture), setting up of National Bank for Agriculture and Rural Development (NABARD) in 1982, etc. were some steps adopted by the government to improve the agricultural finance sector.
Government plays a vital role in agricultural financing. Besides MSP, facilities like Kisan Credit Card (for providing short-term formal credit to farmers at attractive interest rates), different loans like investment loans for investing in irrigation, land development, post-harvest management, agricultural mechanization etc.; short-term loans for procuring seeds, fertilizers, fodder for livestock, agricultural marketing, payment of wages of hired labour etc. are some of the modes of financing taken up by the government. Government also has Interest Subvention Scheme (ISS), which offers short-term loans to farmers at subsidized rates. Different schemes have also been launched by the government like the Pradhan Mantri Krishi Sinchayee Yojana. This scheme aims to achieve convergence of investments in irrigation and also aid in expansion of cultivable area under assured irrigation. It also aims to increase efficiency of water use.
Another scheme is the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN). PM- KISAN introduced in 2018 targeting small and medium land holding farmers was expanded in 2019 to include all farmers. Under this scheme an income support of Rs 6000 per year is to be given to farmers by means of DBT. Government also has introduced the National Crop Insurance Programme (NCIP) with component schemes like Modified National Agricultural Scheme, Weather Based Crop Insurance Scheme etc. NCIP aims to act as a safeguard for famers against loss due to natural calamities, pests and diseases. Under crop insurance another scheme of the government is the Pradhan Mantri Fasal Bima Yojana (PMFBY) which provides comprehensive insurance cover to deal with failure of crop. Government of India launched e-NAM which aims to form a common digitized platform for agriculture in India. The digitization of agricultural sector also aims to increase transparency and do away with the leakages that existed in the financing network. Besides this direct benefit transfer has also been practiced by the government in order to ensure that farmers receive financial aid directly in their accounts.
During the ongoing pandemic, agriculture has been severely affected. Disrupted agricultural supply chains, declining demand, transportation issues etc. have crippled the sector and the farmers are in dire need of financial aid. Indian government took steps to address the woes of the farmers during the pandemic. After the lockdown was announced, the government declared that it would frontload the first installment of Rs 2000 under PM- KISAN to farmers in order to deal with the impact of COVID-19. Further, in order to help the farmers, government extended Rs 20 lakh crore credit at a concessional interest rate to farmers. Besides this, working capital fund of amount Rs 30,000 crore has also been approved by the government that would be disbursed via rural co-operative banks and regional rural banks. These funds aim to address different issues like crop loan requirements of rural banks, improving the agricultural infrastructure, income support for farmers etc.
Drawbacks of the Measures Taken and Steps to Improve
There are certain issues that affect the agricultural finance in India. First, loans issued by banks are not without proper surety and security. As the economic condition of farmers in India is not well established, they find it difficult to arrange for security to get their loans approved. As a result, a significant section of famers remains bereft of the benefits of loan facilities and they tend to opt for loans from non-institutional players which ultimately lead to debt trap and poverty. Second, corrupt practices by officials at different levels adversely affect the farmers. The farmers face variety of issues in order to meet the demands of the corrupt officials and ultimately are unable to gain the benefits of certain schemes.
Third, time consuming procedure, repeatedly changing norms and complicated mode of working of the different schemes demoralize the farmers’ majority of who lack technical knowledge and education. Fourth, in India majority of farmers have small land holdings and some of the government schemes become inaccessible for such farmers as the loans for buying agricultural equipments and farm machinery etc. are taken up by large farmers who have better access to the banks. Fifth, the burden of repayment becomes too much to handle for farmers who have to depend on fluctuating agricultural produce due to erratic climate conditions. Sixth, a major issue is that of mismatch between the schemes on paper and its application on ground. Even though various schemes have been launched by the government, their application is not done properly and subsequently farmers fail to gain entire benefit from the scheme. Lastly, the issue of mounting of over dues and resulting delays in granting loans has affected the famers adversely.
The digitization of all records and the schemes will help to address various issues. Government’s stance on digital India will help to increase transparency and ensure that benefits reach to the beneficiary directly without being interrupted in-between. However, this process needs to be thoroughly managed and monitored so that any existing issues can be easily marked out and necessary steps be taken to address them. There is need for modifying the land leasing framework by adopting adequate policy measures. Proper land leasing framework will work as an incentive for farmers and will motivate them to boost productivity. Government has taken praiseworthy steps like digitization of land record, implementation of e-NAM etc. However, the implementation of these policy measures has remained a cause of concern. Further, there is a lack of consensus among the states and this uneven policy framework creates friction and ultimately affects the farmers.
There is need for establishing a federal institution based on the principle of cooperative federalism. Government of India also needs to push the state governments to complete the digitization process in form of e-NAM, digitization of farm records etc. Efforts should be made to develop the institutional credit delivery mechanisms by utilizing technology. A technology driven portal must be established in order to facilitate ease of credit in terms of loans for the farmers. Innovations like movable warehouses and cold storages must be encouraged and proper investment needs to be made in these areas so as to reduce the loss of agricultural products.
Finance plays a vital role in agriculture. In India, majority of farmers suffer from financial constraints and as a result productivity is adversely affected. Besides, productivity, the economic condition of the farmers is also affected thereby giving rise to a never-ending cycle of poverty, debt and low productivity. In this backdrop, proper financing facilities combined with technological innovations will help to improve the agricultural sector. Institutional investment bodies and their procedures need to be simplified for better understanding by the farmers and non-institutional lenders must be strictly monitored so that they are not able to harm the poor farmers and bind them in a debt trap. Direct transfer benefit along with digitization of agricultural financing and its related segments will prove to be effective for the sector. The network of agricultural finance in India needs to be improved so that it will ensure overall development of the entire agricultural sector.