Manmohan Singh on credit and agriculture

From The Hindu

Indian Prime Minister Manmohan Singh acknowledged that Indian agriculture is in deep trouble, there is a huge rural-urban divide and rural farmers are suffering from four deficits: (1) public investment and credit (2) infrastructure (3) market economy (4) knowledge. He said:

We cannot deny that there is a crisis in agriculture in many regions of the country ... In many parts of the country, agriculture is being carried out in adverse conditions ... There are large tracts where farmers seem to be in acute distress. In many other parts, agriculture is seeing a major transformation and farmers in these parts are reaping the benefits of technology, irrigation, better infrastructure, improved marketing facilities and advanced risk management strategies. It is this duality that we need to tackle.

The Prime Minister further ruminated:

Answers must be found to questions such as: do the farmers need a lower rate of interest or reliable access to credit at reasonable rates? Is our existing institutional framework adequate for meeting the requirements of our farmers who are a diverse lot? Do we need to create new institutional structures such as self-help groups and micro-finance institutions to provide improved and reliable access to credit? Or do we need to bring in money lenders under some form of regulation?

It is unclear to me where micro-finance institutions or self-help groups come into the picture here. The microcredit amounts are considerably smaller than what land owning farmers need. Farmers across the country have been borrowing money from (1) Nationalised banks (2) Agriculturual co-operative banks managed by State Governments (3) Private Money-lenders.

Agricultural co-operative banks are politicised institutions where writing-off loans is quite common. The recently elected Tamil Nadu state government wrote off close to Rs. 7,000 crores of agriculture loans, most of the money to well-off land owners and even fresh loans made just a few months back to buy tractors. Nationalised banks have not indulged in loan write-offs in the recent times. Private money-lenders on the other hand charge exhorbitant interest.

Indian agriculture is in distress because of lack of market economy. The state governments and Food Corporation of India are the major buyers, and the governments fix the price for the staple food. When the governments allow private players to buy the produce, the farmers invariably get better price. But the government cannot allow this to happen since its food reserves have come to the lowest position in the last decade, forcing them to import wheat for the first time in several years. So this depresses the income farmers get. A few droughts here and there, few floods there and here and the farmers lose everything.

Farmers are traditionally male, in India. As such, the Yunus school of micro-credit won't lend to such males. Like Grameen, the micro-credit institutions can demand that the land be transferred in the name of the woman of the household, and then lend money to women. Farming does not generate monthly or weekly income. After 4-8 months of hard work, you get the money only after the harvest. In Tamil Nadu, several farmers were waiting several months for money from the state government after they had sold rice to the government. So the turn-around time could be more than an year. Such farmers cannot pay monthly or weekly installments on micro-credit payments.

Micro-credit survival is based on fortnightly or monthly micro collections. As such what the Indian farm sector needs is credit against produce, combined with insurance against drought and floods. The lending institution should team up with FCI or private players such as ITC/Reliance/Bharti etc. and insurance companies to lend money to the farmers. Through the four-way contract, the farmer agrees to sell his produce to FCI or private companies at a specific price (subject to quality) and the buyer pays the loans off to the lending institutions and pays excess money to the farmer. A portion of the money lent to the farmer goes to the insurance company. Insurance company will compensate the lender and the farmer in case of adverse impact on the produce.

Farmers need reliable credit, but not loan write-off. Farmers need better training, better access to market and Government help in better flood/drought management.