Monday, January 25, 2010

The alchemy of crops, credit and collateral…

It started off well and did make some progress. But the situation of farm credit is definitely not what it should have been, says anchal gupta

In July this year, 14 year old Rida Shaikh of Pune lost her life to swine flu. In October this year, 38 year old Sunil Sutar lost his life to no less heart wrenching circumstances. Rida’s parents sued the Pune hospital for gross neglect and business like attitude. The entire nation watched on TV with pain, agony and a growing sense of fear. For Sunil, the Orissa farmer from Murtumba village of Nabarangpur district, barely a few ever got to know him. Reason? While Rida was one of the earliest victims of a highly glorified ‘pandemic’ which has taken an ‘eye popping’ 500 lives in the country till date, Sunil’s life was taken by himself after he capitulated to the vicious cycle of debt and poverty post another crop failure due to lack of rain. No one was sued. Because no one knows whom to sue and for what?

India, with nearly two thirds of its population dependent on agriculture, stands out as the only country among the world’s twenty largest economies where nearly 45% of farm families still knock the doors of local moneylenders. Out of the remaining 55% going for institutional credit, nearly 80% live at subsistence levels owing to a crumbling irrigation infrastructure, corrupt middlemen system of markets and a stagnant public investment in agriculture as a percentage of GDP for the last 15 years. Ever since the development of co-operatives in the 1950s to help the farmers get access to credit for short and long term needs, there have been vast improvement in terms of the number of districts and total number of farmers covered through institutional credit and the adverse effects of informal credit through moneylenders has been mitigated. The development of institutions like NABARD, innovative models like Kisan Credit cards and microfinance accompanied by RBI policy of stipulating a fixed percentage (currently at 18%) of net bank credit to be directed towards agriculture under priority sector lending has increased the institutional credit flow. At a glance, it appears Indian farming is moving towards realizing an utopian dream.

But the more we delve into farm numbers, the more gruesome the score card becomes. Due to a massive number of marginal farmers holding extremely small farm holding of the order of 1-2 acres, they have absolutely no collateral to offer for attaining institutional credit from commercial banks or co-operatives. The debt relief scheme declared early this year by the UPA government covered farmers owning farms of 4-6 acres while a majority of farmers in the drought hit regions of Orissa, Andhra Pradesh and Vidarbha have average farm areas of 1-2 acres. Another variable largely missed in the equation is the mode of water availability on a particular farmland.

According to A.K. Bandyopadhyay, Chief Economist, NABARD, “Credit has a strong tendency to perch on where it is relatively safe and shy away from the risky rainfed region that constitutes around 60% of the total cultivated area. Since most of the farmers are currently borrowing from financial institutions are located in irrigated areas, the challenge before the institutional credit is to increase its outreach in the rainfed and dry regions.” In fact, a study conducted in Andhra Pradesh pointed that out of the total number of reported farm suicides, 76% victims were dependent on rain-fed agriculture while 78% were small and marginal farmers.

Critically, a look at the distributional disparities across states in institutional credit unearths a root cause for the dismal performance of agriculture. In agriculturally less developed states like Rajasthan, Orissa, Bihar, Chattisgarh and West Bengal, due to huge rural populations, a vicious cycle develops. Average farm areas are so small that farmers don’t have any collateral to offer to institutional lenders. Hence, low levels of credit prohibit the adoption of modern technology and private capital investments leading to stagnated farm productivity and lower values for farm produce compared to rich farm states like Punjab and Haryana. The only way out for farmer to sustain its current year farm operations is to knock the doors of private moneylenders. The last nail in the coffin is the 35-40% interest rate charged by money lenders pushing the farmers to their graves.

For Complete IIPM Article, Click on IIPM Article

Source :
IIPM Editorial, 2009

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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