Loan waiver is not the solution

Since Independence, one of the primary objectives of India’s agricultural policy has been to improve farmers’ access to institutional credit and reduce their dependence on informal credit. As informal sources of credit are mostly usurious, the government has improved the flow of adequate credit through the nationalisation of commercial banks, and the establishment of Regional Rural Banks and the National Bank for Agriculture and Rural Development. It has also launched various farm credit programmes over the years such as the Kisan Credit Card scheme in 1998, the Agricultural Debt Waiver and Debt Relief Scheme in 2008, the Interest Subvention Scheme in 2010-11, and the Pradhan Mantri Jan-Dhan Yojana in 2014.

It is encouraging to see a robust increase in institutional credit from ₹8 lakh crore in 2014-15 to ₹10 lakh crore in 2017-18. Of this, ₹3.15 lakh crore is meant for capital investment, while the remaining is for crop loans, according to the Ministry of Agriculture and Farmers Welfare. Actual credit flow has considerably exceeded the target. The result is that the share of institutional credit to agricultural gross domestic product has increased from 10% in 1999-2000 to nearly 41% in 2015-16.

Clamour for loan waiver

While the flow of institutional farm credit has gone up, the rolling out of the farm waiver scheme in recent months may slow down its pace and pose a challenge to increasing agricultural growth. The Uttar Pradesh government has promised a ₹0.36 lakh crore loan waiver covering 87 lakh farmers, whereas the Maharashtra government has announced it’s writing off ₹0.34 lakh crore covering more than 89 lakh farmers. The demand for a loan waiver is escalating in Punjab, Karnataka, and other States. This clamour is only poised to increase as the 2019 general election comes closer.

There is a serious debate on whether providing loans to farmers at a subsidised rate of interest or their waiver would accelerate farmers’ welfare. At the global level, studies indicate that access to formal credit contributes to an increase in agricultural productivity and household income. However, such links have not been well documented in India, where emotional perceptions dominate the political decision quite often. A recent study by the International Food Policy Research Institute reveals that at the national level, 48% of agricultural households do not avail a loan from any source. Among the borrowing households, 36% take credit from informal sources, especially from moneylenders who charge exorbitant rates of interest in the 25%-70% range per annum. More importantly, the study using the 2012-13 National Sample Survey-Situation Assessment Survey (schedule 33) finds that compared to non-institutional borrowers, institutional borrowers earn a much higher return from farming (17%). The net return from farming of formal borrowers is estimated at ₹43,740/ha, which is significantly greater than that of informal sector borrowers at ₹33,734/ha. Similarly, access to institutional credit is associated with higher per capita monthly consumption expenditures.

A negative relationship between the size of farm and per capita consumption expenditure (a proxy for income) further underscores the importance of formal credit in assisting marginal and poor farm households in reducing poverty. Indeed, access to formal institutional credit also tends to enhance farmers’ risk-bearing ability and may induce them to take up risky ventures and investments that could yield higher incomes. Going by the NSS schedule 18.2 (debt and investment), rural households’ investments in agriculture grew at a high rate of 9.15% per annum between 2002 and 2012. While 63.4% of agricultural investments are done through institutional credit, landless, marginal and small farmers’ investment demand is met through informal sources to the tune of 40.6%, 52.1%, and 30.8%, respectively. Statistics show that nearly 82% of all indebted farm households (384 lakh) possess less than two hectares of land compared to other land holders numbering 84 lakh households. Those residing in the less developed States are more vulnerable and hence remain debt ridden.

Not helping farmers’ welfare

Clearly, a major proportion of farmers remain outside the ambit of a policy of a subsidised rate of interest, and, for that matter, of loan waiver schemes announced by respective State governments. In other words, this sop provides relief to the relatively better off and lesser-in-number medium and large farmers without having much impact on their income and consumption. This anomaly can be rectified only if the credit market is expanded to include agricultural labourers, marginal and small land holders. It is, therefore, important to revisit the credit policy with a focus on the outreach of banks and financial inclusion.

Second, the government along with the farmers’ lobby should desist from clamouring for loan waivers as it provides instant temporary relief from debt but largely fails to contribute to farmers’ welfare in the long run. To what extent this relief measure can help bring farmers out of indebtedness and distress remains a question. This is because farmers’ loan requirement is for non-agricultural purposes as well, and often goes up at the time of calamity when the state offers minimal help. If governments are seriously willing to compensate farmers, they must direct sincere efforts to protect them from incessant natural disasters and price volatility through crop insurance and better marketing systems.

Third, it should be understood that writing off loans would not only put pressure on already constrained fiscal resources but also bring in the challenge of identifying eligible beneficiaries and distributing the amount.

The report of the Committee on Doubling of Farmers’ Income, Ministry of Agriculture and Farmers Welfare, has rightly suggested accelerating investments in agriculture research and technology, irrigation and rural energy, with a concerted focus in the less developed eastern and rain-fed States for faster increase in crop productivity and rural poverty reduction. Additional capital requirements estimated for 20 Indian States are ₹2.55 lakh crore (₹1.9 lakh crore on irrigation and rural infrastructure by State governments and ₹0.645 lakh crore by the farmers) at 2015-16 prices by 2022-23. Public and private investments are required to grow at an annual rate of 14.8% and 10.9% in the next seven years. A diversion of money towards debt relief, which is in fact unproductive, will adversely impinge on state finances, may dissuade lending by the banks, and hence prove counterproductive to the government’s broader mandate of doubling farmers’ income by 2022-23.

Anjani Kumar and Seema Bathla are agricultural economists at IFPRI and Jawaharlal Nehru University, New Delhi, respectively. This piece was originally published in The Hindu 

Wish to increase net farm income? Root for institutional agricultural credit!

Farmer in Uttrakhand. Credit (flickr): Divya Pandey/IFPRI

More than half of India’s workforce is engaged in agriculture and its allied activities. However, the condition of the agricultural community, in the country, is not very encouraging. Lack of accessibility to formal credit pushes the farmers to reach out to the informal credit sources, mainly the local moneylenders, avail credit at exorbitant interest rates and thus, entering into a debt trap.

Indian agriculture policy aimed to reduce the farmer’s dependence on informal credit and increase the accessibility to formal credit. Various policy initiatives have been taken by the government in this regard starting from nationalization of large commercial banks (1969 and 1980) and establishment of Regional Rural Banks (1975), National Bank for Agriculture and Rural Development (1982), to farm credit programs like the Kisan Credit Cards (1998–1999) and the Interest Subvention Scheme (2010–2011).

Efforts have also been made to strengthen the formal credit system through programs like Priority Sector Lending (PSL) and recently with financial inclusion schemes Pradhan Mantri Jan Dhan Yojana (PMJSY) and Swabhimaan. Although these initiatives have indeed made a positive impact in the agriculture credit system with continuous increase in the agriculture credit flow in the rural areas, yet the informal credit sources still account for more than one third of the agriculture credit flow.

Of late, there has been rising demands, in different states of the country, for waiving off farmers’ loan as a measure to deal with the debt crisis. Some state governments have already announced the waivers. However, this appears to be a very short term solution to the current problem. There aren’t much evidence that suggest that loan waivers have a positive impact on either the farm/ household income or their expenditures. Alternatively, increasing farmers’ access to formal credit mechanism is believed to empower them, help them channelize their resources better and in turn boost the agricultural economy. A recent IFPRI discussion paper Institutional versus Noninstitutional Credit to Agricultural Households in India: Evidence on Impact from a National Farmers’ Survey tries to understand the role of institutional farm credit on farm income and farm household consumption expenditures.

The findings of this study reveal that farmers with smaller land size find it difficult to borrow from formal credit system in the absence of collateral and thus resort to borrowing from informal sources. Caste also seems to be a factor affecting the access to formal credit sources as most formal borrowers were from the General and Other Backward Classes (OBC) and fewer from the Scheduled Castes (SC) and Scheduled Tribes (ST).

Apart from this, male-headed household were found to be receiving greater share of institutional credit as opposed to their female counterparts. Educated households had access to formal financing sources more than others. For example, households that are aware of the government schemes such as Minimum Support Prices (MSP) were more likely to obtain credit from formal sources.

Access to formal credit was found to have a direct relationship with the net farm income and per capita household expenditure. Increase in access to institutional credit was seen to increase the farm income and also the consumption expenditure. Thus, accessibility to formal financing could significantly improve the overall economic welfare of the agriculture households.

The study, suggests that existing policy and program initiatives must be scaled up in order to expand the reach of formal credit systems and increase farmer’s accessibility, especially of small and marginal farmers, to institutional credit. As highlighted by the findings of the study, concerted efforts needs to be taken to reduce the social discrimination in the financial sector based on gender and caste. Literacy levels, especially financial literacy levels, need to be improved considerably. Convergence among different policies would significantly help in bringing out desired results and increasing the share of institutional credit in the agricultural credit system. It’s time to break the debt cycle for the farmers and give them their due as economic and social welfare of farmers is a prerequisite for a healthy and progressive India.


Financing of Dairy Value Chains in India

Dairy Farm in Punjab. Source: Tajuddin Khan
Dairy Farm in Punjab. Source: Tajuddin Khan, IFPRI

Did you know, milk contributes one-fifth to the gross value of agricultural output which is larger than the value of output of rice and wheat put together.  In the past four- five decades, India’s dairy sector have seen a significant grown, despite poor access to markets and institutional credit, this progress was possible by millions of small-scale producers in this sector.

A recent IFPRI discussion paper titled “Formal versus Informal- Efficiency, Inclusiveness, and Financing of Dairy Value Chains in India” examines the efficiency, inclusiveness, and financing of dairy value chains using household-level data from Punjab state. The study finds that, on an average, a dairy household sells 88 percent of the milk it produces. About 62 percent of the dairy farmers representing 69 percent of the total sales are associated with formal sector value chains driven by cooperatives and private processors. Cooperatives however are the most preferred channel in terms of both sales and suppliers. But, smaller dairy farmers are more associated with informal value chains, while larger dairy farmers prefer selling milk to formal value chains, driven by cooperatives, multinationals, and private domestic processors. Small dairy farmers though outweigh large farmers in formal value chains numerically their share in milk sales is not large. Hence, it does not seem that formal buyers do not prefer partnership with small farmers.

Further, while exploring the impact of choice of a value chain on milk yield and farm profits the study does not find any significant difference in them across value chains. However, across farms, larger farmers have been found to realize higher profits perhaps due to their better bargaining power in obtaining price terms.

The study also addresses the issue of financing of value chains, and finds that more than half of the farmers borrow credit for dairying related activities both from formal and informal financial sources. The incidence of borrowing is higher among those who are associated with informal value chains. But, chain-based financing is limited to only one-fourth of the borrowing households. Financing by commercial banks is limited and largely to those having larger holdings of both land and animals. Smallholder farmers depend more on social networks of relatives & friends and moneylenders for their financial requirements. This implies that financing decisions of the commercial banks or other financing institutions are largely driven by creditworthiness. The findings of this study have implications. A value chain with its product market orientation can serve as collateral and financial institutions may think of using contract as collateral. Also financing through a value chain is an important means of reducing the transaction costs and lending risks associated with asymmetric information. Financial institutions in India treat credit to dairy as investment credit while farmers need funds for meeting operational costs.  The study thus argues for provision of short-term credit to dairy farmers on the lines of ‘crop loan’ through innovative financial products, such as ‘dairy credit card’. This would enable farmers adopt yield-enhancing technology and inputs and also to scale up their dairy activity.

Who Wants To Quit Agriculture And Why?

Farmer in Nalanda District, Bihar. Source: Divya Pandey, IFPRI
Farmer in Nalanda District, Bihar. Source: Divya Pandey, IFPRI

Agriculture the backbone of Indian economy that engages more than 50 percent of the country’s workforce, is losing its preference as the most desired profession. Research shows that more than 40 percent of farmers dislike farming as a profession because of low profits, high risk, and lack of social status, yet they continue with it owing to a lack of opportunities outside agriculture.

A recent study on “Farmers' Preference for Farming: Evidence from a Nationally Representative Farm Survey in India” identifies factors that underlie farmer’s reasons to move out of agriculture.

Farmers who express a preference for moving out of agriculture are mostly those with small landholdings, poor irrigation facilities, fewer productive assets including livestock, and follow a cereal-centric cropping pattern. They also have relatively lower access to credit, insurance, and information, and are weakly integrated with social networks such as self-help groups and farmers’ organizations. Within caste group, the dislike for farming moderates with larger landholdings.

If look in the past, over the year’s Indian agriculture faced the challenge of stagnation in arable land, rise in population with increase in demand, changing consumer preference and growing small land holder with an average size of 0.38 ha. According to the latest decennial population census 2011, for the first time in the last four decades, the absolute number of farmers in India fell by 9 million, from 127 million in 2001 to 119 million in 2011. However, a commensurate decline in the agricultural workforce did not occur. The share of agricultural workforce in the total employment declined extremely slowly from 74 percent in 1972-73 to 60 percent in 1993-94 and further to 52 percent in 2009-10.

The author’s highlights that lack of profitability, high risk, and lack of social status in farming and others in that order are few of reasons for moving out. About 67 percent disliked farming due to low profits, 18 percent due to high risk factors and remaining 15 percent based it on the low social status attached to the profession and other factors. Across the different farm land classes, low profitability remained the prominent denominator but it is relatively more pronounced among smaller farmers. Risk was directly in proportion with landholding sizes.

Study reveals that by comparing the net returns on the farms of potential quitters (those who don’t like farming as a profession) and willing stayers (those who like farming as a profession). It is as high as 25 percent in the medium (2.0-4.0 ha) farm class and 18 percent in small (1.0-2.0 ha) farm class. Importantly, the probability of quitting does not seem to be much influenced by social identity as the proportion of farmers disliking agriculture as a profession is almost similar across social classes.

The authors identifies number of pull and push factors underlying farmers’ decisions on agriculture. Pull factors mostly relate to the income opportunities outside agriculture for eg. access to non-farm business activities, higher education, income from labour/salaried jobs, while push factors are a reflection of the constrained livelihood opportunities in agriculture, forcing farmers to seek avenues outside agriculture for eg. lack of access to irrigation, farm credit, crop insurance, information on crop agronomy and modern technology. On the other way around access to irrigation and diversification of production structure towards high-value crops and livestock production make farming attractive to stay in agriculture.

These findings have two types of implications; one for the farm sector and the other for the nonfarm sector. The results point toward a tendency of possible decline in viability of agriculture as a profession. It was noted that farmers who practice integrated farming can be a signal for a greater policy emphasis for diversification toward these activities. Farmers need an improved availability of finances, inputs, information, and markets to benefit maximum from technological change and diversification. Since risk was identified as important reason for disliking farming, insurance agencies can target efforts to improve their outreach among smallholders.

Authors conclude that to improve viability of small-scale agriculture, investments and prioritization on climate smart agriculture interventions by the policymakers can be an important step towards improving the food security and rural livelihoods in addition to mitigating the climate impacts.

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40 per cent Indian farmers do not prefer farming as profession

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