Fixing farm credit PDF Print E-mail
Wednesday, 01 March 2017 01:02
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Stop diversion of funds & promote marketing freedom


With the bulk of agriculture credit going to a handful of states like Tamil Nadu and Punjab, as FE has reported, chances are the government will direct banks to step up lending in the laggard states. Uttar Pradesh, for instance, accounts for nearly 19% of foodgrain production in FY15, but just 8% of agriculture credit in that year. In terms of absolute numbers, the real surprise was loans of Rs 1 crore per hectare sown in Puducherry and Rs 69 lakh in Delhi, neither of which are known to be agriculture-intensive areas – while Punjab got Rs 1.75 lakh worth of credit per hectare, Bihar got a mere Rs 42,300 and Odisha Rs 39,300. Given how the prime minister was able to drive the growth in JanDhan accounts, chances are a concerted push by the government should help.


But fixing agriculture lending will take more than just directions to banks. For one, banks lend where there is demand and, in the states that got less credit, with individual farm operations a lot less productive as compared to the top states, the demand for inputs, and therefore credit, is low. Also, to the extent these states have more informal tenancy, smaller farmers do not have the necessary papers to get loans from banks and have no option but to go to the informal sector to get loans. Most important, however, is the need to fix agriculture markets – unless farmers are able to sell their produce at a remunerative price, how can they demand more credit. Despite the high MSPs fixed every year, government procurement takes place in just a handful of states – for the rest, market prices are well below this. Fixing this will mean the government will have to focus on freeing agriculture markets from buyer-cartels and allow genuine markets to develop; allowing futures markets to flourish is an essential part of this as is ensuring FDI in food retail takes off.


While this could fix some of the more egregious differences between states, it cannot end the kind of distortions seen in places like Delhi and Puducherry. As Anwarul Hoda and Prerna Terway in ICRIER found last year, there is a lot of fake credit being doled out since it is so highly subsidized. They found that, between 1998 and 2013, the proportion of agricultural inputs funded by short-term bank credit rose from 16.8% to 100% – and yet, 44% of short-term credit is also reported to be coming from moneylenders. Another study by Ashok Gulati and Terway found a spike in farm loans in the last quarter of the year, one which is not known for much agriculture activity. In other words, while a lot of credit is being given, the farmers who get it are, after meeting what they need, probably relending this out to others. The most sensible solution, then, is to give farmers cash payments to take care of the interest subsidy, probably based on the size of their land-holdings, and then allow interest rates to be market-determined. 


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