The RBI study also found that while livestock, forestry, and fisheries contributed around 38-42% of agriculture output during 2014-16, this sector got just 6-7% of total agriculture credit; clearly, this is an issue that needs addressing.
To ensure that millions of small and marginal farmers—India has a total of around 120 million farmers—are not at the mercy of moneylenders, or other expensive sources of finance, the government has, historically, mandated that banks ensure that a certain share of their lending is to these farmers. Currently, 18% of all bank lending has to be mandatorily lent to the agriculture sector. And, to ensure farmers get loans at low rates of interest, the government pays a certain proportion of the interest to banks directly while farmers pay the rest. This interest ‘subvention’ cost the government Rs 13,045 crore in FY18 and, as compared to that, the FY20 budget target is 37% higher at Rs 18,000 crore. A report by an RBI internal working group on agriculture credit, however, points to major problems in how the scheme is working; in which case, the government probably needs to look at completely recasting it.
The good news here, of course, is that while formal bank credit was just around 10% of total farm credit in 1951, this is up to around 70% today. But, and here’s the problem, the concessional farm credit that is given by commercial banks—mostly in the public sector—is many times greater than the inputs bought by farmers; in which case, what are the loans being taken for? In all probability, as researchers at Icrier and other institutions have surmised over the years, since the loans are at vastly subsidised rates, they are probably being diverted to non-farm users; it is not clear if this is done by bank managers alone, or whether the farmers are also part of the deal. So, RBI found that in Andhra Pradesh, the total bank credit going to the farm sector is 7.5 times the cost of inputs bought by farmers; this is six times in Kerala, five for Goa, four for Telangana, Tamil Nadu and Uttarakhand, and three times for Punjab! On the other hand, farmers in Jharkhand, the north-eastern states, West Bengal, Chhattisgarh, Bihar, Odisha, Maharashtra, Uttar Pradesh, and Rajasthan are not getting credit even to meet their input requirements. Interestingly, a study by R Ramakumar and Pallavi Chavan had found that, in FY09, as much as 46% of the loans by banks were made after the rabi sowing had ended.
The RBI study also found that while livestock, forestry, and fisheries contributed around 38-42% of agriculture output during 2014-16, this sector got just 6-7% of total agriculture credit; clearly, this is an issue that needs addressing. Nor is it clear that small and marginal farmers are getting the loans; most of the loans, it appears, are being cornered by large farmers. In Bihar, for instance, small and marginal farmers were 13% of the total population in the state, but received just 3% of the loans disbursed; the figures for Uttar Pradesh are 16% and 10% respectively. Tamil Nadu is an outlier, and while small and medium farmers are around 6% of the total, they get 12% of the loans. Equally worrying, the loan policy has resulted in a situation where short-term crop loans now comprise 75% of all agriculture credit as compared to 51% in even 2000. In other words, long-term investment in agriculture is getting compromised; at a time when overall investments in agriculture are slowing—investment-to-agri-GDP fell from 18.2% in FY12 to 13.8% in FY17—and, within this, the share of the government has fallen even more sharply, this needs to be corrected. Ideally, the government should stop the practice of subsidised loans, and instead, give the subsidy directly to farmers through DBT; once subsidised loans are not available from the banks, the practice of phantom loans will also stop. Over time, all agriculture subsidies should be trimmed, and money should be invested in creating irrigation, or other facilities that benefit the sector more.