Overhaul farm credit and subsidy

Overhaul farm credit and subsidy

Subsidised loans diverted, elude small farms
If you thought farm loan waivers and the harm they do to rural credit culture was what was wrong with India’s system of mandated credit to agriculture at a subsidised rate, RBI has news for you. An RBI report finds there is large-scale diversion of farm loans to non-agricultural uses, cottoning on to a simple truth that every rich landlord who doubles up as a moneylender has been leveraging to his advantage for years. The report also finds that only 41% of small and marginal farmers have access to bank credit, although they make-up over 86% of farm holdings. Also, eastern states do not get much farm credit.

Credit diversion happens most in the southern states, with their high ratio of agri-credit to agri-GDP. The ratio of crop loans disbursed to input requirements is 6 to 7 in these states. If you can borrow from the bank at 3% and, acting as a moneylender, charge 10% a day on small loans and anywhere between 20% and 40% on larger loans, which sane rich farmer would not be tempted? Clearly, subsidised loans specifically and farm subsidy in general call for a rethink. Income support linked to area cultivated — not necessarily owned — should go hand in hand with rigorous collection of full-cost recovery on inputs ranging from water and fertiliser to power and credit, while still leaving sufficient funds in the overall allocation to the farm sector to spend on rural infrastructure and crop research. At the same time, India’s farm prices should be linked to global prices with graded tariffs that could be varied to absorb shocks. Linking Indian farms to global prices and markets, while inputs are priced optimally and farmers get income support, would incentivise adoption of rational cropping patterns and eliminate surpluses of the kind we have in sugar, rice and wheat.

Another significant finding is that 90% of farm loans go to crops, while these account for only 60% of farm output; meaning that animal husbandry and fisheries, which account for 40% of the output, get just 10% of the credit. There could be separate targets for working capital and term loans.