In farmer's name

Print edition : March 25, 2011

A farmer walks through a field carrying a hose used for irrigation, at Bisothi village near Allahabad.The present strategy of pumping credit into agriculture will not, by itself, translate into sustained growth in agriculture. About one-fourth of the total agricultural credit today is in the nature of indirect finance (which does not go directly to cultivators, but to input dealers, fertilizer dealers, and so on). - RAJESH KUMAR SINGH/AP

The policy is to promote specific high-value segments within agriculture, where corporate houses have major profit interests.

A COMMON compliment that Pranab Mukherjee's Union Budget for 2011-12 received from the media was its proclaimed friendliness to agriculture and rural areas. It was not just the media; members of India Inc. welcomed the Budget as focussed on agriculture. However, a close look at the Budget estimates reveals a different picture. Public spending on agriculture has actually declined. In addition, the larger strategy on agriculture and rural development, which has driven this year's Budget, is highly suspect in terms of its efficacy to sustain any rise in production or productivity.

Expenditures on agriculture

Budget 2011-12 is marked by a major absolute decline in government expenditure on agriculture. Between 2010-11 and 2011-12, the total expenditure on agriculture and allied activities fell by Rs.5,422 crore, or by 4.3 per cent (Table 1). This overall decline was the result of a fall by Rs.5,568 crore of revenue expenditure between 2010-11 and 2011-12. In the same period, the capital expenditure on agriculture and allied activities increased by a meagre Rs.146 crore.

Within agriculture and allied activities, it was in crop husbandry that the largest fall in revenue expenditure occurred. Here, while revenue expenditure fell by Rs.4,477 crore, capital expenditure increased by just Rs.6 crore. In food, storage and warehousing, there was a decline of expenditure by Rs.1,453 crore between 2010-11 and 2011-12. Interestingly, it was precisely in the sphere of storage and warehousing that the Budget received a heap of praise from India Inc.

Much media attention was also paid to the Rs.400 crore allocated in the Budget, as last year, to take the Green Revolution to eastern India. A necessary element in the spread of new technologies is an increase in public spending on agricultural research; however, as Table 1 shows, agricultural research and education witnessed an absolute fall in revenue expenditure by 5.8 per cent between 2010-11 and 2011-12. Further, to allocate a meagre sum of Rs.400 crore for an initiative spread across seven States is highly inadequate (leaving each State with an average of Rs.57 crore). Weeks before the Budget, Bihar Chief Minister Nitish Kumar had termed the similar allocation of Rs.400 crore for the eastern region in last year's Budget as a joke.

Thus, going by the expenditure stance of the government, Budget 2011-12 is a huge letdown for agriculture and allied activities. Given the continuing agrarian distress in parts of rural India, this fiscal stance is hardly friendly to agriculture.

Need for public investment

The record of agricultural growth in India in the second-half of the 2000s was hardly inspiring. Growth rates of agriculture in 2006-07 and 2007-08 were better on the average, riding on good monsoons and hardening global prices. However, the growth rates in 2008-09 and 2009-10 were, respectively, -0.1 per cent and 0.4 per cent. Advance estimates for 2010-11 have raised hopes again, but it is clear that elevating agriculture to a path of sustained growth requires a major increase in public expenditure. In particular, public investment, which would create fixed capital formation in agriculture, has to increase significantly to arrest decisively the trend of long-term decline. Budget 2011-12 plainly refuses to recognise this task as urgent.

A major argument of the proponents of liberalisation in the 1990s was that the long-term decline of public investment in agriculture could be reversed by cutting down on subsidies. Indeed, Budget 2011-12 has continued with the policy of cutting major subsidies in agriculture. If we take all major subsidies, the expenditure is set to fall from Rs.1,54,212 crore in 2010-11 to Rs.1,34,411 crore in 2011-12. Within major subsidies, fertilizer subsidy has been cut by Rs 4,978 crore and food subsidy by Rs.27 crore. However, none of these savings has been passed on to the cultivators in the form of higher public spending. In fact, for the government, the cut in farm subsidy has always been an easy route to cutting fiscal deficits.

Credit as a substitute?

A feature of the past few Budgets of the United Progressive Alliance (UPA) government has been to announce new targets for credit supply to agriculture, and make it look as if a rise in credit flow can be a substitute for rise in public investment. This year's Budget, too, was no different. It was announced that public sector banks would target for a credit flow of Rs.4,75,000 crore to agriculture in 2011-12, as compared with Rs.3,75,000 crore in 2010-11. Further, a continuation of the interest subvention scheme was announced for 2011-12, reducing the effective rate of interest on farm loans.

Indeed, it is supremely important to increase the credit flow to agriculture. The 1990s had witnessed a major slowdown in the supply of bank credit to agriculture. In the 2000s, and particularly after 2004-05, steps were taken to raise the overall credit flow to agriculture. Data show that overall flow of credit to agriculture has risen rapidly after 2004-05. However, the present strategy of pumping credit into agriculture will not, by itself, translate into sustained growth in agriculture.

First, of course, a rise in credit flow does not substitute for a rise in public investment. Availability of credit may drive private investment, but credit need not always be employed productively on the farm. The productive use of individual credit is constrained by the absence of adequate public investment, particularly in irrigation and rural infrastructure.

Secondly, only a part of the additional supply of agricultural credit in the 2000s was directed to cultivators. As Table 2 shows, in 1990, about 87 per cent of agricultural credit was provided as direct finance (given directly to cultivators). However, the share of direct finance declined after 1990, and in 2009, only about 77 per cent of total agricultural credit was direct finance. In other words, about one-fourth of the total agricultural credit today is in the nature of indirect finance (which does not go directly to cultivators, but to input dealers, fertilizer dealers and so on).

Corporates as farmers

The sharp rise in the supply of indirect finance was facilitated by a series of definitional changes made under the UPA regime on what constitutes priority sector credit in agriculture (for details, see R. Ramakumar and Pallavi Chavan, Revival of Agricultural Credit in the 2000s: An Explanation, Economic and Political Weekly, December 29, 2007). These definitional changes broadly involved (a) recognising new forms of financing commercial, export-oriented and capital-intensive agriculture as agricultural credit; and (b) raising the credit limit of many existing forms of indirect financing. For instance, from 2007 onwards, two-thirds of loans given to corporates, partnership firms and institutions for agricultural and allied activities in excess of Rs.1 crore per borrower were considered as indirect finance to agriculture; the remaining one-third were treated as direct finance to agriculture.

As a result of such changes in definitions, the nature of agricultural credit itself has undergone major changes between the 1990s and the 2000s (Table 3). In 1990, about 83 per cent of agricultural credit was of a size less than Rs.2 lakh. In 2009, however, only about 44 per cent of agricultural credit was of a size less than Rs.2 lakh.

A loan above the size of Rs.2 lakh can hardly be termed as a loan to an Indian farmer. Yet, in 2009, loans above the size of Rs.2 lakh constituted about 56 per cent of all agricultural credit. More importantly, loans above size Rs.25 crore constituted about 18 per cent of all agricultural credit. The enormous growth of agricultural credit in the loan size-classes of above Rs 2 lakh is indicative of a huge flow of credit into sectors newly added into the ambit of agricultural credit, such as loans to corporates and partnership firms.

The growth of big-sized loans under agricultural credit was true for both direct and indirect finances. In the case of indirect finances, a whopping 62 per cent of all loans were of sizes above Rs.25 crore in 2009. In the 1990s, direct finances above Rs.1 crore per loan were minuscule in proportion; in 2009, direct finances above Rs.25 crore per loan constituted 4.5 per cent of the total. An additional 6 per cent of direct finances consisted of loans of sizes between Rs.1 crore and Rs.25 crore.

Farms loans from cities?

Geographically, too, there have been changes in the way agricultural credit is supplied. A recent analysis showed that about 20 per cent of India's agricultural credit in 2008 was supplied through metropolitan branches of banks, while another 14 per cent was supplied through urban branches of banks (Pallavi Chavan, How rural' is India's agricultural credit?, The Hindu, August 12, 2010). In States like Maharashtra, about 58 per cent of agricultural credit was supplied from either metropolitan or urban branches in 2008. In other words, there is little evidence to argue that the major beneficiaries of the increase in agricultural credit have been small and marginal farmers. Farmers' organisations, such as the All India Kisan Sabha, have argued that small and marginal cultivators continue to face serious difficulties in obtaining bank loans. Clearly, the major beneficiaries of the recent growth of credit have been corporate and industrial houses with financial interests in agriculture and food processing.

In this background, it is difficult to believe that the Budget's promise to raise credit flow to agriculture will yield results. While the Minister has stated that banks have been asked to step up direct lending, given that loans of large sizes are growing even under direct financing, this direction may mean little.

Budget 2011-12 has also continued with the process of including new activities under the ambit of agriculture. On the one hand, it has cut funds for the creation of farm storage and warehousing facilities in the public sector. On the other hand, it has newly included cold storage chains and post-harvest storage structures in the private sector within the category of agricultural infrastructure. The Confederation of Indian Industry (CII) has heartily welcomed this measure as something it has long been advocating. Rakesh Mittal, chairman of the CII's National Council on Agriculture, stated that these steps will attract large-scale private investments into Indian agriculture.

Budget 2011-12 does not come across as friendly to agriculture and rural areas. Its policy is to promote specific high-value segments within agriculture, where corporate houses have major profit interests. The Budget deftly uses the rural banking sector to promote the interests of these corporate interests, while pulling the state back from the task of raising public investment in agriculture.

R. Ramakumar is Associate Professor at the Tata Institute of Social Sciences, Mumbai.

This article is closed for comments.
Please Email the Editor