Ashutosh Datar
The authorities ensures credit to farmers amongst the best intentions. But they atomic number 82 to horrible outcomes. In his budget speech communication every year, the Finance Minister lays downward an indicative target of farm credit to banks. Banks receive got an explicit target for agriculture lending equally utilisation of their overall priority sector lending target. Banks must give at to the lowest degree 18% of their full loans to agriculture (and related activities allowed past times the RBI). The underlying, unflinching belief is that farmers demand to a greater extent than institutional credit equally against credit from coin lenders. Loans from formal fiscal institutions are cheaper too they make non resort to unscrupulous recovery practices. Crop loans are to a greater extent than oft than non available at a 4 per centum involvement charge per unit of measurement due to a subsidy from the key government, too only about states furnish a subsidy on elevation of it, making crop loans effectively interest-free.
Unsurprisingly, institutional credit to Agriculture has expanded. In the concluding fifteen years for which nosotros receive got information (FY01-FY16), immediately institutional credit (which includes that of commercial banks, regional rural banks too cooperative banks) has increased 12 times! As against this, nominal agriculture gross domestic product has expanded less than 5 times. While only about of the increases inward agriculture credit could live due to ancillary activities that are non strictly farming, in that location sure has been an increment inward the institutional flow of credit to farmers, to a greater extent than than the increment inward underlying nominal activity. So, piece it is the example that a lower cost of borrowing is beneficial to an private borrower, the supposition that this is necessarily beneficial to agriculture at large is questionable.
Agriculture is essentially a commodity business. Producers make non-differentiated goods too no unmarried producer has whatever influence on the cost he tin accuse for his produce. In this regard, it is similar to other commodity businesses such equally steel or aluminum or oil. Thus, every commodity homo of affairs takes a cost risk — he is non sure of the cost he volition realise for his make when he starts his production. Agriculture is in all likelihood less risky than other commodity businesses since the production bike inward agriculture is typically a few months. In other commodity businesses, the production bike lasts a few days too inward the intervening period, the producer is exposed to both cost but also book risk, given the role weather condition plays inward output. Both these risks – cost too book – are inherent inward Agriculture too cannot live eliminated. They tin at best live managed.
One of the principal agency past times which a producer manages the describe of piece of work concern risk is through the working capital missive of the alphabet structure, past times changing the proportion of debt too equity. Other things existence equal, a describe of piece of work concern amongst uncertain cash flows, similar inward the example of a commodity business, is financed through lesser quantum of debt equally compared amongst a describe of piece of work concern amongst highly predictable cash flows like, a similar toll route or an operating mightiness plant. Further, inside an industry, low-cost producers receive got less-volatile cash flows than high-cost producers, who volition oft maintain swinging betwixt net turn a profit too loss. Thus, high-cost producers volition demand to receive got a to a greater extent than conservative working capital missive of the alphabet construction than low-cost producers inside the same industry. Further, inside commodity businesses, since agriculture has to a greater extent than volatile cash flows (due to both book too cost risk equally discussed above), in that location is a demand for agriculture to live to a greater extent than conservatively financed. Else, the risk is of fiscal distress if the risk materialises.
This is where economic science too the thrust of our policy (of pushing to a greater extent than credit inward agriculture) are at loggerheads. More debt, inward the absence of commensurate equity, sets upward farmers for eventual distress, when the inherent describe of piece of work concern risks materialise. The 2013 NSSO written report on Agriculture, ‘The Situational Assessment of Farmers‘ brings this out nicely. If agriculture households are arranged equally per their the world holdings, too so the households amongst smaller holdings (which to a greater extent than oft than non suggests lower wealth) on average generate negative savings. This implies that these households make non generate whatever savings or equity to fund their agriculture business. While that is only i information point, it should live noted that 2013 was a twelvemonth amongst a normal monsoon too a twelvemonth amongst adverse weather, similar the drought years of 2014 or 2015 would live worse inward price of incomes.
The policy of pushing to a greater extent than credit inward agriculture thence leads to 2 perverse outcomes:
One, it encourages farmers to borrow to a greater extent than than what the underlying economic science of the describe of piece of work concern warrants. And irrespective of the cost of credit, borrowed coin needs to live repaid. Almost every performance of farming happens on credit inward many cases (either because in that location is no equity or because debt is ridiculously cheap) amongst the the world itself existence mortgaged inward many cases. Any adverse variation inward output or its cost relative to initial expectation agency a high probability of fiscal distress.
Second, past times allowing farming to popular off on credit amongst petty or no equity, it keeps people inward farming who otherwise ideally ought to quit it. It thence encourages people to stay inward farming, too it does so through increased risk for the farmer, rather than past times reducing his risk. This eventually sets the phase for side past times side circular of farm loan waivers.
The employment inward agriculture is non that in that location is besides petty credit, but besides petty equity. Small too marginal farmers (an overwhelming proportion of agriculture households inward the country) are currently taking on a risk they are incapable of taking. Policy must recognise this. We demand to halt this policy of pushing credit into agriculture, both inward price of quantum too its cost. Let the underlying economic science of agriculture create upward one's hear the correct degree of credit that should flow into agriculture. While this cannot hit off overnight, a gradual reduction should live made. This volition brand farming unviable for many households. But that is precisely what policy should aim for. For, inward the long run, the alone way to brand farming feasible is to trim the position out of farmers too absorb them inward other areas of the economy. That is the alone way size of the pie volition increment for the surviving farmers.
While this plays out inward the long run, fifty-fifty inward the curt run policy should recognise that the alone way the bike of periodic agrarian crises tin live broken is if in that location is a amend allotment of risk inside agriculture. The 2 risks inward agriculture are cost too volume. H5N1 good designed too efficiently implemented crop insurance system tin significantly trim the book risk. Unfortunately, none of the crop insurance schemes implemented so far has achieved this. Minimum Support Price (MSP), the electrical flow policy intervention to eliminate cost risk, does a wretched project principally because it distorts the cost discovery. Whether to a greater extent than of gram is to live produced or corn or wheat is for the marketplace to signal to the farmer through cost movements.
The employment for the farmer is that the cost tin vary significantly inward the months that it takes to harvest the crop from the fourth dimension of sowing. This risk tin live addressed past times having an efficient futures marketplace or past times allowing frontwards contracts betwixt traders or corporates too farmers so that the cost risk is transferred from the farmer to businesses who tin receive got that risk. My express interaction amongst companies suggests that piece businesses are opened upward to this idea, i of the reasons this hasn’t worked is the lack of enforceability of contracts. Policy should thence focus on making this move too take away the friction.
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