AGRICULTURE CREDIT REFORMS IN INDIA

A large proportion of the population about to 52 percent ,in India is rural based and depends on agriculture for a living. Enhanced and stable growth of the agriculture sector is important as it plays a vital role not only in generating purchasing power among the rural population by creating on-farm and off-farm employment opportunities but also through its contribution to price stability. In India, although the share of agriculture in real GDP has declined below one-fifth, As a result, slackening growth of agriculture during last decade has been a major policy concern.

Three main factors that contribute to agricultural growth are increased use of agricultural inputs, technological change and technical efficiency. With savings being negligible among the small farmers, agricultural credit appears to be an essential input along with modern technology for higher productivity. An important aspect that has emerged in last three decades is that the credit is not only obtained by the small and marginal farmers for survival but also by the large farmers for enhancing their income. Hence, since independence, credit has been occupying an important place in the strategy for development of agriculture. The agricultural credit system of India consists of informal and formal sources or institutional sources of credit supply. The informal sources include friends, relatives, commission agents, traders, private moneylenders, etc. Three major channels for disbursement of formal credit include commercial banks, cooperatives and micro-finance institutions (MFI) covering the whole length and breadth of the country.
The evolution of institutional credit to agriculture could be broadly classified into following phase:
1904 - 1969 : Predominance of co-operatives and setting up of RBI

1969-1975 : Nationalisation of commercial banks and setting up of Regional Rural Banks (RRBs)

1975-1990 : Setting up of NABARD

1991 : Financial sector reforms
The genesis of institutional sources appear in agricultural credit could be traced back to the enactment of the Cooperative Societies Act in 1904. The establishment of the RBI in 1935 reinforced the process of institutional development for agricultural credit.

The demand for agricultural credit arises due to

Lack of simultaneity between the realisation of income and act of expenditure

Lumpiness of investment in fixed capital formation

Stochastic surges in capital needs and saving that accompany technological innovations.
Credit, as one of the critical non-land inputs, has two-dimensions from the viewpoint of its contribution

to the augmentation of agricultural growth viz., availability of credit(the quantum) and the

distribution of credit.
Institutional source comprising co-operative banks, scheduled commercial banks and RRBs has been followed for purveying credit to agricultural sector. The policy of agricultural credit is guided mainly by the considerations of ensuring adequate and timely availability of credit at reasonable rates through the expansion of institutional framework, its outreach and scale as also by way of directed lending. Over time, spectacular progress has been achieved in terms of the scale and outreach of institutional framework for agricultural credit

Accordingly, the Reserve Bank and NABARD issued necessary operational guidelines to banks. The flow of agricultural credit since 2003-04 has consistently exceeded the target.In the year 2010-11 the achievement was119 per cent of target. The target of credit flow for the year 2011-12 has been fixed at Rs 4,75,000 crore and achievement as on November 2011 is Rs. 2,94,023 crore.

Farmers have been receiving crop loans up to a principal amount of Rs.3 lakh at 7 per cent rate of interest since 2006-07. In 2009-10, government provided an additional 1 per cent interest subvention to those farmers who repaid their short-term crop loans as per schedule. This subvention was raised to 2 per cent in 2010-11 and further to 3 per cent in 2011-12. Thus the effective rate of interest for such farmers will be 4 per cent per annum.

Initiative has been taken to provide kisan credit cards (KCC) to all eligible and willing farmers in a time-bound manner. The scheme includes reasonable components of consumption credit and investment credit within the overall credit limit to provide adequate and timely credit support to farmers for their cultivation needs. About 10.78 crore KCCs had been issued up to October 2011.

Since the mid-1990s, the growth of the agricultural sector has been low as well as volatile; the growth decelerated from an annual average of 4.7 per cent per annum during 1980s to 3.1 per cent during the 1990s and further to 2.2 per cent during the Tenth Plan period. Growth in agricultural production has decelerated during 2006-07 with the agriculture sector characterised by stagnation in output of major food grains. Per capita annual production of cereals declined from 192 kilogram (kg) during 1991-95 to 174 kg during 2004-07 and that of pulses from 15 kg to 12 kg over the same period. Per capita availability of food grains has, thus, fallen close to the levels prevailing during the 1970s.

Volatility in agricultural production has not only affected overall growth but also exerted persistence pressure on maintaining low and stable inflation. Demand-supply gaps were reflected in higher domestic food prices in recent years. All these evidences apparently point to the fact that higher credit to agriculture is not translated into commensurate increase in agricultural output.

India has systematically pursued a supply leading approach to increase agricultural credit. The objectives have been to replace moneylenders, relieve farmers of indebtedness and to achieve higher levels of agricultural credit, investment and agricultural output. Among earlier studies,found that the output and employment effect of expanded rural finance has been much smaller than in the nonfarm sector. The effect on crop output is not large, despite the fact that credit to agriculture has strongly increased fertilizer use and private investment in machines and livestock. High impact on inputs and modest impact on output clearly mean that the additional capital investment has been more important in substituting for agricultural labor than in increasing crop output.

Between bank nationalization in 1969 and the onset of financial liberalization in 1990 bank branches were opened in over 30,000 rural locations which had no prior presence of commercial banks (called un-banked locations). Alongside, the share of bank credit and savings which was accounted for by rural branches raised from 1.5 and 3 percent respectively to 15 percent each (Burgess and Pande, 2005). This branch expansion was an integral part of India’s social banking experiment which sought to improve the access of the rural poor to cheap formal credit. The estimates suggested that a one percent increase in the number of rural banked locations reduced rural poverty by roughly 0.4 percent and increased total output by 0.30 percent. The output effects are solely accounted for by increases in non-agricultural output – a finding which suggests that increased financial intermediation in rural India aided output and employment diversifi cation out of agriculture.

Credit delivery to the agriculture sector continues to be inadequate. It appeared that the banking system is still hesitant on various grounds to purvey credit to small and marginal farmers. It was suggested that concerted efforts were required to augment the flow of credit to agriculture, alongside exploring new innovations in product design and methods of delivery, through better use of technology and related processes. Facilitating credit through processors, input dealers, NGOs, etc., that were vertically integrated with the farmers, including through contract farming, for providing them critical inputs or processing their produce, could increase the credit flow to agriculture significantly.

In general, it is difficult to establish a causal relationship between agriculture credit and production due to the existence of critical endogeneity problem. However, increased supply and administered pricing of credit help in the increase in agricultural productivity and the well being of agriculturists as credit is a sub-component of the total investments made in agriculture. Borrowings could in fact be from multiple sources in the formal and informal space. Borrowing from formal sources is a part of this sub-component. With data being available largely from the formal sources of credit disbursal and indications that the formal credit as a proportion of total indebtedness is going down, it becomes much more difficult to establish the causality. He also stated that the diversity in cropping patterns, holding sizes, productivity, regional variations make it difficult to establish such a causality for agriculture or rural sector as a whole, even if one had data. Finally, that mere increase in supply of credit is not going to address the problem of productivity, unless it is accompanied by investments in other support services. In the present study, we take a re-look at the problem by quantitatively assessing the impact of institutional credit expansion on agriculture.