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HomeOpinionMost small farmers outside formal credit system. Sitharaman’s announcements won’t help them

Most small farmers outside formal credit system. Sitharaman’s announcements won’t help them

An RBI report says that despite numerous existing initiatives, at most 40 per cent of India’s small and marginal farmers are covered by formal credit.

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There is no doubt that agricultural credit is a critical element of both agricultural production and marketing across India. However, during a period of acute crisis, the government needs to bank on channels that are relatively robust and far-reaching. Unfortunately, especially when it comes to small and marginal farmers, the current channel of choice—the formal system for agricultural credit in India—falls well short.

The second set of announcements unveiled by finance minister Nirmala Sitharaman Thursday under the Narendra Modi government’s atmanirbhar Bharat push focused on directing food and financial assistance to migrants, small farmers, small vendors, and the self-employed.  At this critical juncture in the agricultural season, the focus on small and marginal farmers should be welcomed. But we are now operating within a brave new economic vision and rationale, where laws act as the fourth factor of production and loans are the primary lifeline against widespread distress and declining demand. So, those who cultivate the land, and labour for a living, must now put their faith in credit.

Also read: India’s rural economy is facing its biggest challenge, and the pain is only getting worse

Low coverage means limited access to credit

Let us consider the two measures that the government has announced.

The first is the sanction of Rs 30,000 crore additional emergency working capital funding for farmers through the National Bank for Agriculture and Rural Development (Nabard) to be targeted at rural co-operative banks and regional rural banks. However, we know that priority sector lending to small and marginal farmers —the focus of this relief package—is very limited. In its 2019 report, the Reserve Bank’s Internal Working Group to Review Agricultural Credit estimated that despite numerous existing initiatives, at most, only 40 per cent of India’s small and marginal farmers are covered by formal credit.

Across most states, and especially in eastern India (Bihar, Odisha and West Bengal), the share of the number of accounts held by small and marginal farmers is also disproportionately low when compared to their actual numbers. Moreover, as the report notes, these estimates are based on landholding-based data that exclude landless farmers—tenant farmers, oral lessees, sharecroppers—who are a significant proportion of farmers in many regions and remain systemically excluded from the existing formal agricultural credit network. Small and marginal farmers and landless cultivators continue to be largely dependent on informal sources of rural credit. So, it is quite a stretch to assume that this same banking system will now effectively transmit this additional infusion of credit to nearly 3 crore small and marginal farmers in the upcoming season.

Also read: Why Punjab’s farmers are dumping water-guzzling paddy for cash-crop cotton

KCCs too have limited coverage

The second major announcement is Rs 2 lakh crore concessional credit boost to 2.5 crore farmers through Kisan Credit Cards (KCCs). But once again, the record of coverage under KCCs, a scheme first introduced in 1998, over 20 years ago, should concern us. The RBI’s Internal Working Group estimated that as of 2019, only around 45 per cent of all Indian farmers possessed an operative KCC and that given the existence of multiple accounts per farmer, the percentage is likely to be even lower. Indeed, Nabard’s own NAFIS Survey 2016-17, reported that only 10.5 per cent of agricultural households were found to have a valid KCC.

Instead of utilising the PM-KISAN platform to further front-end and disburse cash transfers (it is after all a DBT scheme), the database is now to be used to extend coverage of credit under KCCs. But the PM-KISAN database has itself had trouble with the identification of farmers and also only includes landowning farmers, leaving out landless farmers, tenant farmers and sharecroppers.

In addition, now livestock farmers and fishermen are also to be covered by KCCs, while the method for their identification is unclear. More generally, livestock and allied activities remain woefully uncovered by formal agricultural credit, of which 90 per cent goes towards crop loans. Once again, while the intention to include livestock and fisheries in this new infusion of working capital is laudable, given that they are currently almost completely out of the purview of existing channels makes it difficult to comprehend how this can count as relief.

Also read: Karnataka govt announces Rs 162 cr relief package for weavers, vegetable & fruit growers

Emergency measures need different approach

It would be one thing if these announcements were made as part of a routine Budget speech. Even then, we would be at pains to stress the importance of actual institutional capacity and inclusive systems of delivery. But adding the word ‘emergency’ to such measures simply will not do the trick on the ground.

Agrarian and rural distress was intensifying long before the lockdown. Farmers and agricultural labourers now face an extremely challenging and uncertain season of cultivation ahead. They are going to rely most immediately on the existing formal and largely informal systems and networks for agricultural credit, production and marketing, wherever they are.

Central and state governments should use existing channels to ensure cash (through PM-KISAN and other means) and work under MGNREGS are widely available, and extend the financial and institutional support that these systems need to be truly demand driven.

Most importantly, they need to urgently put in the preparation and coordination required to ensure that all agricultural inputs, especially seeds, are in circulation and accessible to farmers in the weeks ahead, when they need it the most. Farmers are past masters at understanding the importance of time and timing in economic life. The government, as ever, has much to learn from them.

Shoumitro Chatterjee is an Assistant Professor of Economics at the Pennsylvania State University. Mekhala Krishnamurthy is Senior Fellow and Director of the State Capacity Initiative at the Centre for Policy Research and Associate Professor at Ashoka University. 

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  1. Why it was not done in last 70 years?
    1. When Modi opened Jan dhan account for poor, it was mocked by Congress. Today Congress is telling to transfer money in this account

    2. When Modi started using Adhar card effectively for government schemes to benefit poor, Congress went to court to stop it.

    3. When Modi brought land acquisition law to bring land reforms for poor farmers, Congress opposed it tooth and nail.

    4. When Modi is trying to make india self – reliance using Make in India, Congress mocks it

    5. Even during lockdown and unprecedented economic situation, Modi is trying to make ‘atmanirbhar’, Congress is mocking it. Congress knows only one type of economics: Just transfer money in account. Shame. Their this policy of socialism destroyed our country economically by 1991 but unfortunately they termed it as great economic reform

  2. 1. Views expressed in this article are thought-provoking. After reading this article, I think readers become aware of deficiencies in current policies about agriculture, particularly with respect to small/marginal famers. 2. Citizens like me who live in urban areas always seek a straight forward answer to this simple question: who is responsible for the current rural distress or rural turmoil that has denied a fair share of income from farming activities? 3. Can a serious student of India’s political economy overlook fact that Congress party, with or without its alliance parties, was in power in the Centre for as many as thirty years during last five decades before 2014, but the Congress party and its alliance parties did not give justice to small and marginal farmers? 3. As an urban areas’ representative question that comes to my mind is this: how could problems of big farmers (who may own 10 or more hectares of fertile land) be same as those of small farmers? How can all farmers be classified in just one category? I think there will be those who own irrigated land and those who depend on monsoon rain. Then there will be small/medium and large farmers. There can be many categories. Point is that each category has own peculiar problems, some of which are related to droughts, excess or untimely rains, some are market related and some are created by inept handling of farm issues and some are due to lack of easy credit. There can be a big list of problems and reasons for the plight of our small/marginal farmers.
    4. My submission is that if we classify all rural households as ‘farmers’, it is quite possible that our bureaucracy takes care of only influential section of middle and large farmers, and in the process it overlooks problems of small and marginal farmers. Is it not time that we deal with problems of all small & marginal farmers on a priority basis? If these farmers face difficulties on account of natural disasters like drought or untimely rain and need financial support it is our Central & State governments’ responsibility to mitigate them.
    5. Hence, I think protecting interests of small and marginal farmers, who own less than two hectares of farm land, and who form a vast majority of rural households, should receive utmost attention today. 5. In this connection I believe citizens living in metros, cities, towns etc will gladly pay a special tax/surcharge on income tax, proceeds of which tax can go to needy farmers’ bank accounts.

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