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«Productivity of Rural Credit: A Review of Issues and Some Recent Literature M.S. Sriram W.P. No.2007-06-01 June 2007 The main objective of the ...»

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Apart from the above, very small evidence, we are not able to establish causality between increased availability of credit and agricultural productivity. We may be able to examine this in some detail if the data pertaining to input costs, credit component [both formal and informal], crop production and yield data is available at the district level over a period of time. This comprehensive data is however difficult to obtain.

Addressing the Issue of Agricultural Credit

Let us first look at agriculture independent of overall rural credit. We have a situation where the needs of agriculture are met with aggressive targeting by the State on volumes and pricing. However, the other rural sector is not getting the necessary thrust in the policy pronouncements. Because of the uni-focus on agriculture, a large non-farm segment gets left out of the policy space.

At the consumer level as the pricing of non-farm segment is distinctly different from agricultural credit, it is also likely that the farm credit gets adversely used in other sectors. Because of the policy on pricing of agricultural credit there are incentives for customers to involve in cross-purpose arbitrage, and possibly in arbitrage across individuals. There are indications that the positive impact on poverty may not necessarily be due to agricultural lending (Burgess and Pande 2003). The authors have found no evidence of “elite capture” of the social lending programmes as they find that agricultural loans are well distributed across all land holding patterns. Thus it is possible to interpret that what goes out as agricultural credit may be reaching the correct client segments, but might not be used for the stated purpose.

When we look at the rural markets from the demand side, we will have to cull out the characteristics of their financial flow patterns. The following paragraphs are based on a study carried out in 2004-05. One part of the study was located in Dungarpur district of Rajasthan where we had collected data exclusively from 416 poor households1. We also collected data from 600 households each from Dharmapuri district of Tamilnadu and West Godavari district of Andhra Pradesh. The Tamilnadu and Andhra Pradesh data were collected from a random sample of households drawn from villages in the service

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area of a bank. The idea here is to give a flavour of the diversity of the possible needs for agriculture itself.

Each of these regions is diverse, and endowed differently as far as resources are concerned. Dungarpur is known to be backward, with a fair amount of people migrating in search of livelihoods and agriculture being barely at subsistence level. In Dharmapuri, while the local economy was found to be vibrant, the district is drought prone and survives on rainfed agriculture. West Godavari on the other hand is a district that has good resource endowments as far as agriculture is concerned.

In Dungarpur we found that only about 25 percent of the people available for employment indicated that they were involved in cultivation, though at the household level many more households actually had access to land. The census statistics indicate that around 59 percent of the workers are engaged in cultivation (Census of India, 2001). This difference might be partly because of the method of data classification2 and also because we were dealing with only poor families who possibly has lesser access to productive land. On the data collected on cash flows from agriculture – only 7 percent [28] households indicated that the cash income they get from marketing their produce was greater than the cash expense for investing in agriculture. The market arrivals figures seem to confirm this fact that a very low percentage of the production of that area seems to arrive in the market. Here, we are dealing with absolute subsistence level of agriculture.

In Dharmapuri also we found that around 411 persons [25 percent of the people available for employment] reported their primary source of engagement as agriculture.

In terms of households, these people represented 318 of the 600 households surveyed.

The district statistics indicate around 39 percent of the workers being engaged in cultivation. Of the 318 households, only about half of the households reported surplus cash flows from agriculture.

In West Godavari, 218 persons [15 percent of the people available for employment] reported their primary source of engagement as agriculture. These represented 254 of the 600 households surveyed. The district statistics indicate that around 12 percent of the workers are classified as cultivators. While the incomes reported from agriculture were much larger than in the other two districts, we find that a larger number of people were engaged in wage labour – mostly in agriculture.

The above figures indicate that while a large number of households might be involving themselves in agriculture, not all members of the family fall into the cultivator category. There is also a wide variation in the percentages of people involved as cultivators. This data might indeed give some relief to the banking sector – that they might actually be correct in moving towards higher average loan sizes in agriculture – focussing on where agriculture is being carried out commercially rather than concentrate on fragmented holdings where agriculture is seen as a part time subsistence based occupation.

For instance, in Dungarpur it would be extremely difficult for a formal financial institution to undertake financing of agriculture because most of the produce is retained for consumption and thus – even a production loan for agriculture will actually be a consumption loan. In Dharmapuri while larger number of households report income from agriculture, in terms of providing employment, it engages lesser percentage of people available for employment. We see here that only about a sixth of the households that we surveyed that could carry out commercial agriculture. The picture in West Godavari is slightly different because the average land holding size

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here is larger than the two other districts. Thus, while the number of households engaged in agriculture would be less, most of them would be in commercial agriculture. Thus the scope for commercial lending for agriculture seemed to have a potential in Godavari district.

Combined with the indications from other literature and our own study in three districts, it appears that in general the supply side policy seems to be chasing targets of a sector that has a mix of both subsistence level activity and commercial activity.

The subsistence level activity would not produce enough cash flows to service the loans, unless the household has supplementary income from other sources. However these households continue to operate in agriculture for reasons for basic food security and cultural aspects pertaining to ownership of land, even if it were not productive.

We thus argue that possibly a good part of the “production” loans for agriculture could actually be “food security” loans. If one were to seriously analyse the productivity of agricultural credit, it might be a good idea to focus on the larger farm sizes and on clusters that have commercial agriculture where credit might make a difference.

Productivity of Agricultural Credit: A Review of Other Important Issues

To address the issue of productivity of agricultural credit, we have to look at the conditions precedent that makes credit effective. In the following section, we review these issues. We need to recognise the fact that Indian agriculture is going through a fundamental change in recent times and in some areas leading to agrarian distress.

Therefore it is impossible to ignore the following issues.

Technology Issues:

Indian agriculture has gone through a fundamental change after the green revolution years. Farmers have shifted from their traditional crops to varieties that improve yields, but are resource intensive. An estimated 40 percent of the Gross Cropped Area was listed under high yielding varieties3. This is also seen in the shift in cropping pattern from coarse cereals to other grain. For instance, between the decade of the 1950s and 2000 the area under Rice, Maize, Wheat, Tur, Sugarcane, Oilseeds, grew dramatically, the area under Jowar, Bajra, Ragi, Barley, Small Millets, gram, and fibres other than Cotton and Jute fell4. This shows a significant movement away from saved seeds [which were under the control of the farmers] towards purchased inputs.

During the five decades when we take the average5 of the decade of 1950s and compare it with the average of the decade of 1990s the following facts emerge6.

• The overall area under cultivation has increased from around 107 million hectares to around 123 million hectares [14 percent growth]

• The area under irrigation has increased from around 18 million hectares to about 40 million hectares [120 percent growth]

• Agricultural production has increased from 65 million tonnes of decadal average to 195 million tons of decadal average [198 percent growth]

• Yields have increased from 600 Kgs per hectare to around 1600 Kgs per hectare [160 percent growth] However it is also evident from the data that incremental coverage of irrigation is no longer leading to commensurate incremental yields. Part of the explanation might be that in the initial years along with the irrigation there were significant interventions affecting other inputs such as high-yielding variety seeds, and increased use of fertilizer and other inputs.

Page No. 8 W.P. No. 2007-06-01


Research and Publications The need for water for these varieties is increasing while the availability of water might not have kept commensurate pace. Indian agriculture has moved to a stage where almost all the inputs/resources come from the markets. This move is away from recycling of produce on which the farmer had a control. These resources providers may have taken a short-term view of agriculture and agricultural markets.

The first fall out of this inherent change that has happened in the agrarian scene is the de-skilling of the Indian farmer. With every new technology the farmer has learn afresh. Learning happens over time, with re-skilling not being in correspondence with de-skilling. To master the skill and to understand the externalities involved the farmer resorts to sowing the same crop over and over. With fragmentation of holdings and land available per farmer getting smaller the tendency is towards mono-cropping. Thus diversity within the plot in a season and diversity of cropping on the same plot over a period of time takes a back seat.

Commercial crops like cotton are grown on small holdings, with inadequate land available for subsistence food crops. While at the macro level data indicates that the overall area under food grains has grown by around 13 percent in the past five decades, around 21 percent in food related crops, the growth of area under Non-food crops is much faster in the five decades. The ratio of food to non-food crops has moved from 80:20 to 74:26 in the past five decades. Given that there is a net addition of cultivable land, we can see the thrust in the overall numbers7. However, this figure in itself might not be alarming at the level of the overall economy, but it is important to examine what this does to a small holder farmer.

The food security net that was largely within the household because of growing food crops might move to the markets. Obviously the farmer who stops growing food crops and moves to commercial crops has to pay much more to buy out this food from outside due the multiple layers of margins of the intermediaries. This involves cash pay out and the households could get into debt if there is a mismatch between the timing of inflows from commercial crops and consumption necessities. Thus while on the one hand production needs credit due to external inputs, even consumption becomes credit dependent.

Issues with Inputs: Seed

A movement from retained seeds to bought out seeds one element of control is lost. In moving away from traditional to hybrid, [40 percent of the cropped area being under hybrid seeds] the activity has become resource intensive. The genetically modified seeds have taken technology to a higher platform, requiring even greater skills. Either way the farmer loses. If there is an early success, it gets repeated. But an early success may lead to two negative fall outs. If the conditions are not conducive as the first event, then the downside loss is greater than ex-ante; with the difference in prices between ordinary and research intensive seeds, the risk of spurious seeds filling the middle price range increases. At the end of this cycle the farmer is unable to

figure out why he lost. The other issues on seeds are:

• Are the prices of research based seeds justified? Is the risk of germination and other aspects being adequately covered?

• Are the quality parameters clearly articulated?

• Does the state machinery have the wherewithal to deal with deviant behaviour on quality?

• Are the instructions on package of practices, including spacing recommended by the interested seed companies reasonable and fall within ethical parameters?

Page No. 9 W.P. No. 2007-06-01


Research and Publications

• How does the changed package of practices following new research get conveyed to the farmers?

• Is the produce grown as seed and rejected under quality parameters ejected out of the supply chain? Are there safeguards to ensure that they do not come back into the loop?

• Are there monopolistic tendencies in the market due to the IPR regime that creates opportunities for arbitrage and a market for spurious seeds?

• Is the role of agencies like seed certification agencies clearly defined and are they being held accountable?

Issues with Inputs: Research and Extension Services

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