Prime Minister Manmohan Singh’s promise that the coming Budget would announce cheaper credit for farmers shows how little we have learnt from past mistakes. Cheap credit, as numerous studies show, is not the answer to farmers’ woes. What is more important is timely access and having the right policy framework. It is no exaggeration to say farmers’ interests would be best served if the long-standing neglect of the agriculture sector is finally addressed through concerted policy action.
The issue of poor access to credit for small and marginal farmers reflects, in fact, the gap in both delivery and demand for credit, with the latter arising from the former. Excessive state control on both commercial and cooperative banks has fostered inertia, inefficiency and, in the latter, rent seeking. The inevitable fallout has been high indebtedness and dependence on moneylenders. Given high interest rates charged by moneylenders, farmers would clearly prefer cheaper institutional finance—even when market-determined. Provided banks are willing to lend and also willing to tailor products to the credit needs of marginal and small farmers. Their cash flows (and loan servicing) depend on two harvests in a year, and they find it tough to face two major risks—on yield and price—that affect the credit cycle and lead to debt accumulation. Also, while there has been some policy movement in micro credit (NGOs, SHGs, etc can now be business correspondents for commercial banks, for instance), the cooperative credit structure is grossly under-utilised. The experience of Andhra shows that removal of state control works very well. It is also worth reiterating that to help banks find lending attractive, the mechanisms of risk mitigation such as crop insurance must be made to work at the ground level; small farmers are not even aware of such moves.
At a macro policy level, the problem is one of low public investment (since the 1990s, a mere 0.3% of GDP) in agriculture, even as over 60% of our cropped area is wholly rain-dependent, and weak technology dissemination. Ironically, in the name of helping the farmer, we are guilty of wasting scarce resources on food and fertiliser subsidies; our total subsidy bill far exceeds both public and private investment in agriculture, while 10% of total bank credit is tied up by government borrowing to hold wheat and rice stocks. The assurance on cheaper credit is clearly based more on populism than on economic logic. Any special package must initiate and correct the multiple distortions in agriculture. No less.
