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Issue No.: 570 | December 2014

Agriculture and Rural Indebtedness - IV

R. M. Mohan Rao
Freedom from British Rule did little to improve the lot of the Farmer. This is so even today 67 years after Independence.

In this the 4th part of the series on ‘Agriculture and Rural Indebtedness’ Prof. Mohan Rao discusses the Agriculture Policy Framework

Critical Issues (continued)

(iii) Institutional Credit flow to Agriculture

Government initiatives through support to institutional sources reduced the role of private channels in rural credit from 92.7 per cent in 1951 to 30.6 per cent by 1991. We do not have evidence to show whether this has further come down or increased. Indications are that this positive trend might have reversed due to the weakening of the cooperative credit structure and rural banks on the one hand and financial sector reforms affecting rural credit flow from the banking sector on the other.

The myths against the greater flow of institutional credit to agriculture, particularly from the banking sector, needs to be dispelled. The arguments that poor recovery, bad debts, and Non Performing Assets [NPA] are more in agricultural loans are not well founded. The over-dues of banks from agriculture are far lower when compared to the total number of suits filed against borrowers enjoying advances of Rs.1 crore and above. There are 5,013 suits among the latter aggregating to Rs.27,988 crores as on 31 March 31, 2000. During 2001-2003, a period of consecutive droughts in many states the NPA of agriculture to outstanding advances formed 12 per cent as against 9.4 per cent for non-priority sector as a whole. But in absolute terms they are Rs.7,635 crores in agriculture as against Rs.28,764 crores in the non-priority sector.

The relatively low share of NPA in non-priority sector vis-a-vis agriculture have to be seen in the light of the discriminatory policy of onetime settlement for debtors in non-priority sector and absence of similar options for agriculturists. Even if NPA are really higher in agriculture, it has to be seen in relation to the adverse natural conditions viz., excessive rains, droughts, cyclones, and uncontrollable pests; and due to irregular or insufficient supply of electricity - factors beyond the farmer’s control. The differences in NPA, if any, cannot be attributed to the wilful default on the part of farmers and one cannot justifiably conclude that the urban and the affluent are more honest and law abiding than the rural and the less affluent.

There is also need to reflect on the rationale behind charging higher rates on agricultural loans while charging lower rates on consumer items of a luxury nature. Similarly, inadequate agricultural loans are subject to multiple restrictions on end-use while crores of rupees are advanced outside agriculture without any restrictions on end-use and that too, without proper documentation.

(iv) Risk and Uncertainty in Farming

Risk and uncertainty are intertwined with agriculture. Among the various insurance schemes introduced to cover the farmers’ risks, crop insurance is the major one. However, this has not taken roots due to the farmers’ dissatisfaction with norms relating to area, premium charged, compensation payments, and the like. Crop insurance, if effective, can help farmers overcome production risk. But there are other risks such as market risk and price risk.

(v) Viability of Farming

Viability of farming is affected due to decline in man- land ratio, non-existence of value addition to products at the local level, and absence of supplementary incomes from on-farm, off-farm activities in the rural areas.

Trends in distribution of ownership holdings show that the proportion of sub-marginal holdings has increased from 35.24 per cent in 1971-72 to 40.11 per cent by 1991-92. Similarly, marginal holdings increased from 17.74 to 20.52 during the same period while a marginal decline was noted in respect of smallholdings from 15.49 per cent to 13.42. An almost similar trend is noted in the case of operational holdings as well, with a rise in the share of marginal holdings from 50.62 to 61.58 per cent during 1970-71 and 1995-96 (See Annexure IV)[i].

Achieving viability of these holdings through contract farming, often talked about in recent forums on farm issues, doesn’t seem to be an effective solution. Given the unequal partnership among players involved, the absence of required discipline to honour delivery schedules of supply of raw materials from small farmers at contract prices, particularly during periods when market prices are higher than contract prices, this is an impractical proposition at present. This novel venture with mixed outcomes can be a distant solution in the absence of mechanisms to strengthen and safeguard the interests of the parties and more particularly absence of effective farmers’ organizations to articulate farmers’ interests.

(vi) Cost of Production and Profitability

The cost of production data of the Comprehensive Scheme (CS) of Government of India showed that significant changes have occurred in the structure of cost of production over the last two decades reflecting both changes in technology and the relative prices of inputs. It also showed that though diffusion of yield improvement continued in the 1990’s, it slowed down considerably for most crops and in most regions whether measured by the use of inputs such as fertilizer or by resulting growth in yield. There is also a deceleration in the growth of private real capital stock in agriculture.

Increased use of purchased inputs together with increase in costs in a scenario of decline in output in the recent period had adversely affected profitability in Indian farming. For instance, fertilizer consumption per hectare increased six-fold from 16.08 kg in 1971- 72 to 95.23 kg in 1999-2000 at the all India level. It was as high as 162.68 kg in Andhra Pradesh in 1999- 2000. According to the cost of cultivation data of the CS, the share of hired labour charges in the total cost of paddy at the all-India level increased from 22.42 per cent in 1971-72 to 32.71 per cent by 1998-99. Similarly, in respect of sugarcane in Andhra Pradesh, it increased from 19.55 to 31.87 per cent between 1970- 71 and 1990-91. The share of paid out costs for paddy at the all-India level increased from 56.05 in 1970-71 to 62.08 per cent by 1998-99.

The margin of gross value of output (GVO) over costs (i.e., paid out costs plus imputed value of family labour and owned land and capital) per hectare almost stagnated  during 1988-93 – 1995-2000.  It  was Rs.2,754/- per hectare during 1988-93 and Rs.2,793/- during 1995-2000. The GVO-Cost A2 ratio is not only low but also witnessed a slight fall. It was 1.23, 1.23 and 1.21 in 1981-86, 1989-93 and 1995-2000 respectively. Though the number of agricultural labourers grew at 3.70 per cent during 1990’s, payments to hired labour grew at 3.10 per cent per annum (CPIAL deflated), which is much higher than the value of farm output. The all-India rate of growth of real (CPIAL deflated) Farm Business Income, i.e., (the difference between value of output produced and costs actually paid) per hectare decelerated sharply from 3.21 per cent per annum during 1980 to 1.02 per cent per annum during the 1990’s.

In this context, it must be noted that whether a household earns adequate income from farming or not depends on farm size and cropping intensity among other things. Since average farm-size has declined from hectare 2.30 in 1970-71 to 1.41 in 1995-96, the outcomes were less favourable in cultivator terms than per hectare.

This discussion paper was prepared by Prof. R. M. Mohan Rao, retired Professor, NABARD Chair, Waltair, Andhra Pradesh. The purpose of serialising this paper is to invite readers to share their views on the issues raised to recommend policies that would ensure a fair deal for India’s farmers.

[i] Email:  or write to Freedom First, 3rd floor, Army & Navy Building, 148, Mahatma Gandhi Road, Mumbai 400001, if you are interested in getting a copy of Annexure IV.





Other Articles in this Issue

Between Ourselves

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M. V. Kamath: A Personality Sketch


Remembering Rajaji

The Wit and Wisdom of Rajaji


“I Touch a Sensitive Spot”

C. Rajagopalachari

Rajaji in his ‘Dear Reader’ page, in Swarajya


Remembering Sardar Vallabhbhai Patel

Rediscovering The Sardar

T. H. Chowdary

When the Princely State of Hyderabad was integrated into the Indian Union


Assembly Elections: Haryana and Maharashtra

Haryana A Decisive Victory for the BJP

B. N. Mehrish

Maharashtra: Have the BJP and the Shiv Sena Missed the Mandate?

Nitin G. Raut

Prime Minister Modi – 6 Months After

Modi Triumphant

Firoze Hirjikaka

Modi’s Detractors in America

Sardul Singh Minhas

Federalism, Governance and Growth

Sunil S. Bhandare

The Political-Economy of Black Money in India

Ajit Karnik

Point Counter Point : Every issue has at least two sides

Maharashtra Elections

Ashok Karnik

Ottawa Attack

Ashok Karnik

The Black Money Hype

Ashok Karnik

The Rural Perspective

Agriculture and Rural Indebtedness - IV

R. M. Mohan Rao

Foreign Relations in the 21st Century

Containment And Cooperation: Continuity and Change in India’s China Policy

B. Ramesh Babu

Book Review


Lok Raj Baral


Vappala Balachandran

Educating Adults

The Legality of ‘Tolerated Prostitution’ - Remembering Meliscent Shephard as we Debate

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Legalising Prostitution – The Way Forward

Elizabeth Rosen

Sending Sheetal from a Red Light Area to a U.S drum school?


Facilities Alone do not make for Good Education – A Personal Experience

Suresh C. Sharma

Compelling Scientists to Teach

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From Our Readers

Andhra Pradesh Day

T. H. Chowdary

Preserving Our Nationhood and Culture

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Why this Discrimination?

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“A Tale of Three Nations” - A Correction

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Many Voices from the Past

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