Now is the time to make bold moves and put money in farmers’ accounts and let markets do the rest
The Union Budget for FY17 has provisioned Rs 15,000 crore on account of interest subvention on short term agri-credit, up by Rs 2,000 crore over the revised estimate of FY16. Mere shifting of this line item from Department of Financial Services to Department of Agriculture, Cooperation and Farmers’ Welfare (DoA) gave an illusion as if the funding for DoA was drastically raised by 127%! In reality, it was only notionally better.
But here we are more concerned about the swelling unpaid bills of interest subvention scheme. The last few budgets have consistently under-budgeted the amount actually needed for interest subvention subsidy, and as a result, the cumulative unpaid bills on this account to banking system had already touched Rs 35,000 crore in FY15. If not nipped now, they may cross Rs 50,000 crore by FY17, without much benefit to majority of farmers. Why do we say so?
Interest subvention scheme was introduced in 2006-07 with a view to help farmers with cheaper credit for crop-loans. It provided interest subvention at 2% to banks for making crop loans available to farmers at 7%. Further, an additional subvention of 1% was introduced to farmers who repaid their loans on or before the due date, which was increased to 3% in 2011-12. Thus, farmers who pay their dues on time receive a subvention of 5% and are charged an effective interest rate of 4%. Some states (like Madhya Pradesh) have given loans at even zero per cent to farmers. The banks are required to first credit the eligible amount of subvention to the farmer’s account and thereafter seek reimbursement from NABARD/RBI. Therefore, any delay in settlement of claims to the banks and/or insufficient budgetary allocations towards this scheme could have severe implications on the financial health of the banking sector.
With short term agri-credit growing at an average rate of 18% per annum for the last five years, the financial liability under this scheme has been increasing sharply. However, in recent budgets, allocation for this scheme is far below the actual requirements, resulting in mounting backlog of unsettled claims of banks. This cumulative backlog (call it unpaid bills) stood at almost Rs 35,000 crore by FY15. The budgeted amount of Rs 15000 crore in FY17, therefore, is obviously way too small to meet the current year needs and to settle the previous backlog of banks.
All this perhaps could have been justified if surging agri-credit was leading to high growth in agriculture and rising profitability. But the reality is exactly the opposite. In the last two years, average agri-GDP has collapsed to less than 0.5% and profitability in farming has crashed, leading to acute farm distress.
The puzzle between rising farm credit at cheaper rate and falling farm incomes can be understood if one digs a little deeper to see how this scheme is being implemented. It smacks of substantial diversion of funds away from agriculture. A farmer who receives loans at a concessional rate of 4% has incentive to borrow as much as possible and then divert at least a part of it in fixed deposits earning around 7-8% interest or even become money lender to extend loans at 15-20% interest rates to those who don’t have access to formal institutional sources of finance. It is curious to find out that the short-term credit from institutional sources exceeded even the total value of inputs used in agriculture in 2014 by about 10%, while at the same time the data from AIDIS revealed that 44% of loans taken by farmers were from non-instutional sources in 2013. This clearly indicates that a substantial part (at least 30 to 40%) of crop loans under interest subvention scheme is getting diverted to non agricultural uses. A further supporting evidence of this comes from sudden spike in agri-loans that one witnesses in the last quarter of the financial year, which often cross 60% of the annual disbursement, when actually there is not much agri-activity during January-March quarter.
It is time to wake up in time and plug these ‘leakages’ and rationalise this interest subvention subsidy. RBI Committee on Medium Term Path on Financial Inclusion (2015) has already recommended phasing out interest subvention scheme and moving towards universal crop insurance.
We suggest that it is better to use an income policy and directly transfer money to farmers’ accounts linked to Aadhaar for all inputs subsidies like fertilizers, seeds, farm machinery, and agri-credit, and give them freedom to choose the right mix of inputs at market prices. We need to change the policy instrument from price policy (subsidising inputs) to income policy (direct transfer to farmers’ accounts), and this will help reduce massive efficiency losses in the system.
China has already moved in that direction, perhaps heeding to the advice in Deng Xiaoping’s famous saying “It doesn’t matter whether the cat is black or white, as long as it catches mice”.
It is now time for India to think and make this switch. Farm sector is already crying for bold reforms. Let it begin by directly transferring input subsidies to farmers’ accounts and let the markets of these inputs, be it fertilizers, seeds, credit be freed. This will save on various ‘leakages’, which hover anywhere from 30-40%, promote efficiency, and will be more equitable as subsidy income package can be designed on per hectare basis, with smaller ones getting higher rates on per hectare basis and larger ones, lower rates. So, it will be a win-win situation. Politically also, it will pay off handsomely as money will come directly to the accounts of farmers, and Prime Minister’s seminal work in Jan Dhan Yojana will start bearing fruits. It is now time to make bold moves and put money in farmers’ accounts and let markets do the rest.
Gulati is Infosys chair professor for agriculture and Terway is a research assistant in ICRIER.