Agriculture Policy Briefing GM Crops

Abolish Cheap Farm Loans, Subsidize Crop Insurance Instead, Says RBI Commitee

India-Heat-Wave-2005

Interest subsidies favour short-term crop loans over long-term capital formation. Uncompensated crop losses also result in indebtedness and loan-write offs, says the committee. Vivian Fernandes reports on its recommendations.

Gradually abolish interest subsidy on crop loans and use that money to subsidize an insurance scheme covering all crops and all farmers, starting with those owning less than two hectares each, advices a Reserve Bank committee on financial inclusion.

Crop loans up to Rs three lakh are subsidized by two percentage points and if they are promptly repaid there is an extra subsidy of three percentage points. The amount spent on this subsidy has risen more than four-fold from Rs 2,011 cr to Rs 9,476 cr between April 2009 and RBI-LogoMarch 2015.

Since crop loans are of short-duration, subsidizing them discriminates against long-term capital formation in agriculture, which is essential to boost productivity, the committee observes. The subsidy usually does not flow to the actual cultivator. Even farmers who own less than two hectares do not tend to be cultivators. But because they have titles to land they get the loans, which they lend to lessees at higher rates of interest. This can be inferred from the rise in the ratio of outstanding agricultural loans to gross value added in agriculture from 36 percent to 39 percent between 2011 and 2015 without a corresponding rise in productivity.

The committee on medium-term path on financial inclusion headed by Reserve Bank Deputy Governor Deepak Mohanty gave its report to the RBI governor at the end of December, 2015.

The committee prefers crop insurance to subsidized loans, because governments are compelled to provide relief when natural calamities result in crop damage. Weather aberrations have increased in frequency. If crop losses are not compensated, farmers default on loans to banks, which results in periodic write-offs. This damages the credit culture and affects the viability of the agricultural credit system.

The committee says crop insurance should be heavily subsidized with the farmer paying a ‘nominal premium’. Initially, the maximum pay-out should be limited to Rs two lakh to cap the government’s subsidy. Insurance should be mandatory for all agricultural loans. Those with larger land holdings should be able to obtain higher insurance cover with lower government subsidy.

The committee notes that universal crop insurance will reduce the premium cost. Some calculations, it says, suggest the rate will fall to less than 3 per cent from the current 8-11 per cent of sum assured, if area covered increases to say, 100 million hectares.

The committee wants the Agriculture Insurance Company to encourage competition among insurers by inviting bids from private companies, arrange reinsurance of claims, ensure that there is at least one accredited automated weather station every ten kilometres and install additional rainfall data loggers.

Satellites, GPS-enabled handheld devices, drones and micro-devices can make assessment of losses and payment of claims more efficient, by reducing the number of cut crop samples.

The committee notes that access to bank credit is vital for improvement of agricultural productivity. The flow of agricultural credit has increased from Rs 8.14 lakh cr in 2010-11 to Rs 14.140 lakh cr in 2014-15, and a large number of accounts have been opened. But most landless cultivators are financially excluded.

A Financial Inclusion Insights study conducted by Intermedia, a global research consultancy that interviewed over 45,000 respondents across 22 states indicates that 43 percent of those who work primarily in the agricultural sector do not have access to a bank account. The survey reveals a large disparity between farmers and farm workers: 36 per cent of farmers and 55 per cent of farm workers did not have a bank account.

Most small farmers live on the edge. The committee cites the example of Mrittunjoy of Amnan village in West Bengal’s Hoogly district. He has a little over half an acre. The cost of cultivating rice and potatoes is Rs 31,000 and his yearly expenses on self and family are Rs 67,000. He earns Rs 41,000 and makes up the rest by making packets or engaging in MNREGA work. At times he borrows from moneylenders by pawning his meagre assets. It is a precarious existence for millions like him

The committee recommends the provision of credit eligibility certificates, which Andhra Pradesh pioneered under a 2011 law. These certificates protect the rights of owners but enable those without land to obtain loans. The committee says the Reserve Bank should modify its guidelines for banks to lend to tenants and lessees against such certificates

States should give priority to digitisation of land records. The formalisation of land titles and access to credit are connected. A study in Andhra Pradesh showed that computerisation had a significant impact on credit volumes. Land titling and digitisation can improve access to credit if the records are up to date and third parties, such as banks, can gain easy and affordable access to reliable registry information (that is, record of rights, register of lands, tenancy and crop inspection register, mutation register and disputed cases register).

(Top Photo: Pre-monsoon heat wave in the Indian sub-continent between 25 May and 1 June, 2004.  Photo courtesy of Earth Observatory, NASA.  RBI logo courtesy of Wikimedia Commons)

Email This Page

Leave a Comment


Hit Counter provided by technology news
Web Design MymensinghPremium WordPress ThemesWeb Development

I Do Not Understand Bt Cotton technology; I Know It Works

Kallanagouda PatilY Kallanagouda Patil, 46, of Uppinbetegeri village in Dharwad taluk  owns 52 acres jointly with his three brothers. He holds a diploma in agriculture from a school in Raichur. Patil grows cotton on ten acres, apart from sugarcane, potato, Bengal gram, jowar, tur,moong and vegetables. He uses groundwater to irrigate his fields. The water is drawn from a depth of 280 feet. Electricity is free so he flood irrigates the fields, except the one under banana  where he uses drip irrigation. He does not micro-irrigate cotton because it is closely planted and has to make way for another crop after eight months. This farmer has his cost all worked out. Making quick mental calculations, he estimates the cost of cotton crop at Rs 22,500 an acre and the realization from 17 quintals an acre at Rs 68,000. He had planted Bayer seed. ‘I do not understand technology, he says, all I know is if I use Bt seed there will be no

Pests Snack on Chilly But Not Cotton

RudagiF Basavaraj Rudagi, 48, did not grow cotton before 2008. This farmer from Saundhi village in Dharwad district’s Kundogol taluk made a partial switch to Bt cotton as chilly was susceptible to pest attack and yield was declining. From five acres in 2009, Rudagi had fifteen of a forty acre joint farm under cotton this year, when smartindianagriculture  caught up with him in February. He tried out Bayer in a change from Mahyco and Raasi seed. Rudagi says he got 11.5 quintals (100 kg) an acre from his rain-fed crop and at Rs 4,050 a quintal, his realization was a little over Rs 46,000. The cost, he says, is Rs 26,000 an acre, excluding rental earnings had he leased out the land. This does not mesh with the profit he claims he makes, but then he admits to not keeping crop-wise accounts. Rudagi also grows peanuts, coriander, gram, safflower and jowar. There is safety in diversity. And yes he plants pigeon pea or tur around the cotton crop for bollworms to feed on so they are not forced by the survival instinct to develop resistance to Bt protein.  In this sense he is quite a cut apart. Low cotton prices are worrying but what is the alternative?