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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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Research is moving from the public domain to the private domain. There has been no dramatic increase in the budgets of the state agricultural universities. Overall the amount budgeted for all the universities and the Indian Council for Agricultural Research has been in the vicinity of Rs.1500 crores. Extension services have traditionally come from the state through agricultural extension officers. Post nationalisation public sector banks hired agricultural officers to be posted in rural branches. Though they technically did not provide extension, they probably asked the right questions during the appraisals. While we do not have publicly available data on the staffing pattern of banks, anecdotally the banks do confirm that the recruitment of extension officers in the past decade and half has not happened. The next big chunk of extension came from Fertilizer companies. However, due to quota and sale of fertilizer, the companies promoted fertilizers generically than as a brand. The last bit of extension came from research driven by agricultural universities and institutions of excellence in agricultural sciences.

With economic liberalisation, we may say that the extension machinery of the state has failed. There recruitment of agricultural officers in banks has fallen. The farmers are now dependent on the input suppliers for technical advice. The agricultural universities are strapped for research funds. The graduates of these universities are lapped up by private sector companies thus slowly transferring the intellectual capital from the public domain to private space.

Extension offered by self-interested parties has problems. They are integrated in the financial markets driven by quarterly revenue considerations; are and are generally myopic. There is a conflict of interest with brand-technology owners providing extension, with no alternatives provided from a public institution having no vested interests.

Issues with Inputs: Water

Water is a concern expressed time and again. This is a result of the cropping pattern shifting to water guzzling crops – the largest growth of area under crops in the past five decades is represented by rice, wheat and sugarcane and vegetables which are water intensive. The other crops that have increased the area include maize, oilseeds and coconut. Even within crops grown on rain fed conditions, people have moved towards wagering on resource intensive high yielding crops. Water use is becoming inefficient – because of the following factors.

With a bore well, we create a private asset from something that is a public good.

Lucrative agriculture is in areas where there is water. People who have no access to water as a public good [canals, tanks] naturally look for private solutions. As the intensity of digging deeper [with falling water table] increases, it has negative

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ecological impacts (Vaidyanathan 2006). Coastal areas for instance can have problems of salinity ingress.

The implications for the productivity of agriculture are:

• We need to dig deeper to get the same amount of water, therefore the capital cost of sinking a borewell increases, with an associated increase in the probability of failure. The other capital cost that goes up is associated with the increased cost of the motor and pipelines that has to be used to draw water from so much deeper.

• The recurring cost of drawing water from a deeper well is more due to increased use of diesel or electricity.

People who do agriculture with assured water will not revert to rainfed conditions.

However, the returns fall as more people dig wells, and more water is drawn. This manifests in indebtedness leading to a debt trap. A study indicated that most finance for private borewells had actually come from informal moneylenders – thereby also increasing the costs of servicing the loan (Venkateshwarulu and Srinivas 2000).

Fragmentation of land holdings only accentuates the problem. Regulations pegging the sanction of a loan based on ecological considerations and minimum distance parameters between wells only push the farmers to informal sources as has happened in Warangal.

There are no easy solutions in this. The general shift of privatisation of public goods is a theme across all inputs.

Issues with Inputs: Pesticides The issue is also related to agricultural technology and input supplier driven extension services. In addition there are issues pertaining to spurious products operating in markets that are not mature, but are price conscious. Going to the input supplier for a solution is like going to a doctor with an ailment. Once one is in the clutches, it is difficult to extricate, as one is never sure of the downside of not listening to the advice. There is also a tendency to recommend preventive use of pesticides. The collateral effect of spraying on the health of the farmer is a related aspect that may act as an impediment.

The Society for Elimination of Rural Poverty [SERP] in Andhra Pradesh has put in practices of pesticides usage and claim that there is significant reduction in costs with no significant downside effects on yields. This is a good example involving very intensive extension efforts. SERP is able to leverage its pre-existing teams that are doing other work. The other states do not have this infrastructure, and it calls for public investments in this area.

Support Systems: Risk Mitigation The one missing link in agriculture is the lack of risk mitigation products. The inherent risk mitigation practices do not work with externally managed input supply and extension services, and affects the basic food security of families.

Firstly we need to address yield risks. While we have comprehensive crop insurance schemes, they do not address the problems of the individual farmer. The unit for loss assessment is too wide to compensate individual farmers. But the farmers have to pay the premium on an individual basis and there is a mismatch between the unit of payment and the unit of risk settlement. The problem pertains to the costs involved in

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assessing the risks. The existing insurance product does not address the individual risks.

There are various elements that affect the yield starting with the quality of the seed used and the germination. The growth parameters could be hampered by temperature, rainfall, pest attack and the amount of fertilizers used. Except rainfall and pest attack all other parameters pertain to the individual enterprise of the farmer, while what is being compensated is the collective result. It is necessary to break up the risk elements into measurable and identifiable units. Even then, assessment at an individual farm level is difficult.

Temperature and rainfall risks are being experimented, but these need investments in weather stations. In order to effectively cover risk given the nature of land holding and fragmentation, the solution lies in adopting a Self-help group like approach to loss assessment. However, this is very complex to implement. Having loss assessment at least at the gram panchayat level might improve the confidence of the farmers.

From the above discussion it is clear that the Indian farmer is at the receiving end – he is in an enterprise where the entrepreneur is not insulated from the enterprise. While in the formal industrial sector, due to the limited liability clause, the entrepreneur is generally insulated from failure, this is not so in agriculture. The inappropriate risk mitigation products also indicate that there are no effective external means of covering this element.

The other risk pertains to the price risk which also hurts the farmer and makes him vulnerable. Price volatility could somewhat be addressed if commodity trading is opened up for small lots where the farmers could take cover. However, we need to build safety nets so that they do not end up using the commodity exchanges for speculative purposes.

We have also found that increased inputs do not necessarily transfer into better prices.

Even if the returns increase, they may not be in proportion to the increase in costs.

Farmers do not get adequate price; risks have gone beyond weather and natural calamities to input induced crop failure. In Indian agriculture the relationship between risk and return stacked against the farmer. If the yield is good, there is no assurance that the price would be good. Therefore while there is a limit to the upside returns, the downside risks could be as high as 100 percent of the investments, and could cumulate in a misery as experienced by farmer households that have seen distress and suicide.

Addressing the Issue of Non-Agricultural Rural Credit

In addition to the issue of agriculture, it is important to look at the other sectors. The rural economy is not homogeneous to be amenable to schematic lending. Indeed our data from three states indicates that it might be appropriate to look at credit as a part of a basket of financial services. However, across regions we the following characterise

rural transactions:

• The exchanges have a large non-monetised element. While exchanges are on the basis of rupee value, transactions do not get settled frequently. For instance one might agree on a daily wage rate, but ultimate settlement takes place through a few cash exchanges in a season, beyond a minimum daily subsistence that might be settled in kind. The cash exchanges are less. We find this practice prevalent with migrant workers and their Mukaddams;

Page No. 12 W.P. No. 2007-06-01


Research and Publications

• The sources of cash flows in the local economy are not diversified. In agrarian economies we have heightened economic activities around harvest time. Thus we find even the other services getting settled around that time. For instance we found in Khammam District that a local cable television operator had his monthly subscriptions paid up regularly, his income from new subscriptions would spurt during the harvest time. Traditionally we know that even service providers like the dhobi, and barber were paid in kind around harvest time, in addition to the minimal payments they received through the year.

• The income diversification of individual households is limited, with most households depending on one or two significant streams of income.

• The exposure to risk is higher. We find rural activities are outside the organised “formal” entities. Thus they cannot cover the downside risk. The entrepreneur and the enterprise are seamless, unlike in the urban settings, and any business failure [including agriculture] affects the personal finances. The formal business on the other hand can be insulted through the limited liability clause. The general usage of cash is on an inflow-outflow basis rather than an income-expense basis. Thus any formal insurance is seen as a continuous outflow with no perceivable inflows. In some of the rare cases where they see the merit of the risk cover, the settlement process does not give them confidence to continue an ongoing relationship.

• Because of the above, the rural households are vulnerable. It is argued that people moving out of poverty slip back to poverty due to pressure points (Krishna 2003). If we were able to formulate policies that prevent people from slipping back into poverty, the net poverty reduction figures could show a remarkable progress.

Therefore, when we look at the rural markets from the demand side, it is possible for us to offer an array of need based interventions that would make an impact on the cash flows, increase monetisation and the participation of the formal sector, making exchanges discover market mechanisms.

Non- Agricultural Rural Credit: Supply induced interventions

Even in the non-farm sector, major interventions have been supply induced. Most of the schemes like the IRDP, SGSY or any schematic lending programmes have looked at lending to the poor for self-employment purposes. There is an inherent flaw in this design because it assumes all people not involved in cultivation want to be selfemployed. Looking at the pattern of engagement of the rural people for earning incomes, it is evident that a significant proportion of the rural population is wageemployed.

From Table 2 we see that a third of the population work as agriculture labour, and a significant number work outside of agriculture. While it is sharper in the national statistics, we see that even the number of people outside of cultivation is significant.

Even people involved in agriculture seem to be employed part time on somebody else’s plot as wage earners.

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Our Dungarpur data indicates that around 40 percent of the persons available for employment worked for wages, and around 5 percent of the employable persons migrated. In Dharmapuri district around 28 percent of the people available for employment [514/1813] worked for wages. In West Godavari around 62 percent of the persons fit for employment worked for wages [1022/1675]. A significant number of people are actually working outside of agriculture. Thus any programme that depends on the enterprise of the people – other than agriculture – addresses the needs of a small percentage of the population. Our data indicated that the most significant number [18 percent of the employable population] were in self-employment in Dharmapuri, while the corresponding figures were 3 percent and 2 percent respectively for West Godavari and Dungarpur districts. Thus supply induced selfemployment schemes could be addressing only a small part of the issue.

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