Agriculture Credit: Declining Access of Real Farmers

India is the world's second largest food producer with highest number of farmers and farming-dependent population. This vast section of population has been witnessing ever growing distress with sagging confidence in farming, largely on account of inept policy interventions of the post-reforms period, wherein, the agricultural loans have been diverted to industry and commerce, by deliberate and protracted dilutions in the definition of agricultural credit for the window-dressing of the government's achievements. The recent enhancement of the provision for agriculture credit to Rs. 8.5 lac crores, along with a slew of many other measures in the budget for 2015-16 of the NDA government can indeed alleviate the plight of farmers effectively, provided the access of the farmers to agricultural credit is again restored.

Deliberate Dilutions: Policy dilutions, leading to financial exclusion of poor farmers had been initiated as early as in 1993, when Dr. Manmohan Singh was the finance minister. Till 1993, only direct finance to cultivators was counted as part of the priority sector lending, for meeting the target of 18 percent bank credit for agriculture. But, from October 1993, indirect finance was also allowed to be counted together with the direct finance to cultivators for fulfilling the priority sector target of 18% loans for agriculture. The government has thereafter, kept on diluting the definition of 'indirect credit to agriculture' to include even the corporate borrowings as well as infrastructure project fundings in indirect agriculture credit. By virtue of this, even the loans given to the multinational companies like ITC and other contract farming and agri-processing companies too are now being counted into the quantum of loan extended to farmers, which amounts to almost up to 50% of farm sector indirect loans in states like West Bengal etc.  Only four of such one dozen dilutions made by the government are enough to be given hereunder to expose the tactical deprivation of real farmers from agriculture credit under the decade long regime of Manmohan, Sonia and Rahul's trio. These dilutions are:

(i)                  The loans given to even power distribution corporations or companies, emerging out of the bifurcation or restructuring of SEBs as part of power sector reforms were ordered to be considered as indirect finance to agriculture from July 2005.

(ii)               The loans to food and agro-based processing units with investments  in plant and  machinery up to  RS 10 crore (other than the units run by individual, Self Help Group and cooperatives in rural areas) are also being considered as indirect finance to agriculture since April 2007.

(iii)             From April 2007 onwards, two-thirds of loans given to corporates, partnership firms and institutions for agricultural and allied activities (such as beekeeping, piggery, poultry, fishery and dairy) in excess of Rs 1 crore in aggregate per borrower have been declared to be considered as indirect finance to agriculture. The rest of the one-third amount was to be treated as direct finance.

(iv)              From October 2012 the loans given to corporates, partnership firms and institutions for agricultural and allied activities in excess of Rs 2 crore in aggregate per borrower are also defined to be treated as indirect finance. Even such loans of amount less than Rs 2 crore are being treated as direct finance.

Indeed, the indirect loans which were less than 15 percent in 1980s have now crossed over to 25% of total agri-credits, which are never accessed by the farmers.

Growing Dominance of Big and Non Cultivating Borrowers: since 2000, the advances of Rs 10 crore and above, and even up to Rs 25 crore are on increase while no ordinary ordinary farmer can afford to borrow such huge sums. Table No. 1 clearly shows that the share in total of advances of the loans of size "less than Rs 2 lakh" have contracted from 82.3 per cent in 1990-91 to 44.7 per cent in 2010-11. On the other hand, the share in total advances above Rs10 crore increased sharply from 1.2 per cent in 1990-91 to 20 per cent in the year 2010-11.  Farmers normally cannot take a loan of Rs 10 lakh or more. Mostly the cultivators do not take a loan of more than Rs. 2 lakh. So, probably the increasing share of agri-credit must be going to the input dealers or agri-business firms or corporate groups involved in agricultural and allied activities.

Table 1 Amount-wise distribution of outstanding agricultural advances of scheduled commercial banks.

Loan size (Rs)	Share of amounts outstanding in various ranges in %
	1990-91	2010-11
Less than 2 lakh	82.3	44.7
2 lakh to 10 lakh	4.4	22.9
10 lakh to 1 crore	7.9	6.2
1 crore to 10 crore	4.1	6.1
10 crore to 25 crore	1.2	2.6
Above 25 crore		17.4

Urban Centric Loans on Rise: The real farmer is mostly village dweller, while, there is an increased absorption of agricultural credit from urban and metropolitan branches, depicting a fall in the share of agricultural credit in rural areas. (vide table 2). In 2011, about one-third of total agricultural credit and one-fourth of direct agricultural credit were outstanding from bank branches located in the urban or metropolitan areas reflecting continuing diversion of agricultural (indirect) credit towards urban-based dealers and agricultural (direct) credit to urban-based corporates (as part of direct credit) and altogether depriving the real farmers based in rural areas.

        Table 2 Share of agricultural credit outstanding with rural and urban branches from 1990-2011

Year	Share (%) of agricultural credit outstanding from
	Rural branches		Urban or metropolitan branches		All branches
	Total Agriculture Credit	Direct Agriculture Credit	Total Agriculture Credit	Direct Agriculture Credit
1990	85	88	15	11	100.0
2005	69	84	30.7	15	100.0
2011	67	74	33	25	100.0

        

 Uneven Disbursement Across the Year: It is most astonishing that over 40-45% of annual agriculture loans are often disbursed in the last quarter of the financial year by most of the commercial banks, probably just to meet their targets. Of this fraction also about one third to half of it is often disbursed in the last month of FY i.e. March itself.  The last quarter of a financial year or the month of March is not the normal period of borrowing by the farmers when the sowing is over.

Growing Dependence on Non-Institutional Lenders: Continuons deprivation of real farmers from institutional credit has been compelling them to depend more upon the exploitative and non-institutional lenders. Therefore in the All India Debt and Investment Survey of the National Sample Survey Organisation in the 70^th round reveals that non-institutional agencies played a major role in advancing credit to the households. Particularly in rural India. The non-institutional agencies had advanced credit to 19% of rural households, while the institutional agencies had advanced credit to 17% households.

Prohibitive Pre-Sanction Costs: Since, almost 50% of the farmer are small and marginal farmers and the agriculture loans are not cost free and the farmer approaching a bank for a loan of over Rs.1 lakh, has to spend more than Rs 3,000 just for documentation. This expenditure of 3% of the loan value even before the loan is disbursed is a prohibitive levy.

Plight of Farmers: In 2013-14 as well as 2014-15 the unseasonal heavy rains, thunder and hailstorms have ravaged the due-for-harvesting chana, lentils and wheat in Madhya Pradesh, wheat mustard, cumin  and all other crops in Rajasthan and onions and grapes in Maharashtra. Instead of an expected bumper harvest on the back of excellent monsoons, farmers reaped only misery.

To conclude, India needs a better customised and well targetted farm sector loans policy for the exclusive benefit of real cultivators, including tenant cultivators. Indirect agricultural loans be altogether be stopped from being reported as agriculture loans, atleast to arrive at the priority sector lending targets. In addition to it the insurance outreach for farm sector too needs to be spread fast, as hardly 5-10 percent of the farmers are able too avail crop insurance benefits. Plight of the ordinary farmers can be well understood from the mere fact that if 3 lac farmers have committed suicides since 1991 in the country, the remaining 100 million farmers and their families too are surviving in the same socio-economic circumstances, in which those 3 lacs have committed sucide. Hence, agriculture needs a 360° approach for the redressal of their problems to allevite the plight of neo-liberal economic reforms.

Full Capital Account Convertibility: Need for Caution

The debate around capital account convertibility is once again likely to become live in India after the Reserve Bank of India Governor, Raghuram Rajan referred to the need to move towards with a pre-defined time frame. Though it was capital account convertibility, in an academic context while speaking to students at the Gokhale Institute of politics and Economics in Pune. Every time when this issue emerges, arguments are made for fuller capital account convertibility, the governments officials, economists and investors all begin weigh the pros and cons of convertibility, until it is realized that the timing is not yet right and it would be perileous, then the debate closes. Same fate of this debate can be expected this time as well. .

However, the minister of state for finance Jayant Sinha too immediately after, picked that very hastily and even stated that capital account convertibility is one of the measures that India must take over a period of time such as to become a leading global economy. He further asserted that we have to make it possible for our capital markets to be broader, deeper and for that, capital account convertibility also becomes important, Though Mr. Sinha said so without specifying any particular time frame. But FCAC is not the need of our economy at all. Rather, it is more of long awaited opportunity for foreign institutional investors and speculators

In every respect time is still not ripe for moving to full capital account convertibility (FCAC) and would prove to be a misadventure as yet. Attempts are being made for FCAC since 1997. In 1997 on but, after learning a lesson from the Asian crisis of 1997, P. Chidamberam the then finance minister in the third front government had to retreat from his firmly declared intent to do so. The IMF, one time strong votary of the capital account convertibility (CAC) for India, too had to abandon its campaign for the same, then in the late 90s itself. The most vociferous advocate of the IMF’s erstwhile campaign for the CAC worldwide, and former chief economist of the World Bank, John williamson too had thereafter become the most skeptical of the results of FCACC and had cautioned India too that any premature move towards it would increase the risk of things going worse.

What the full capital a/c convertibility would mean?

Capital account convertibility means legal freedom for every citizen or non-citizen as well as corporates in the country to convert there rupee assets into any foreign currency and back for all kinds of capital transactions. India has current account convertibility but not capital account convertibility. Every one of us would have the option to have even our ordinary bank fixed deposits too into any currency, without seeking any approval from anywhere. Thus it would mean:-

·         Freedom to convert local financial assets (including those of Indian citizens and corporate) into foreign ones at market-determined exchange rates.

·         Allows to freely exchange of currency and an unrestricted mobility of capital into and of the country.

·         May be beneficial for a country with very strong external sector fundamentals. Because it enhance faith of investors into that currency and inflow of foreign investment too might increase. But, India altogether lacks such fundamentals, with heavy trade, current account and fiscal deficits. 

·         Therefore, the flip side, is that it might destabilize the economy due to massive surge of capital flows in and out of the country.

It is no secret that if Indians are given freedom to convert and maintain their capital balances in foreign currencies in overseas banks and if Indian banks are allowed to raise up to 100 percent of their capital, by overseas borrowings as earlier recommended for phase - II and III by the Tarapore committee - II, appointed by the RBI. Then, majority of the elite Indians and corporate units might rush to convert their capital balances from rupees into dollars, euros and pounds. Many persons would borrow funds in foreign exchange, speculate in derivative trading in currencies and may even get bankrupt to bring unprecedented pressure upon the exchange rate. This would deflate demand for rupees and generate insatiable demand for leading foreign currencies, ultimately leading to a meltdown of rupee value to any depth.

Such a meltdown would not be a distant possibility after the FCAC, as our economy is even not as mature as were the South East Asian Economies in the pre-1997 crisis period. All those economies viz. the South Korea, Thailand, Malaysia, Indonesia and Philippines were having much stronger macroeconomic fundamentals. The growth rates were booming, inflation rates were low, forex reserves were piling up. Inflow of foreign capital was steadily growing in the pre crisis year and all these 5 economies received a net capital flow of $ 93 billion. Yet, they faced a shivering crisis solely due to the FCAC. Had there been partial restrictions on convertibility the crisis would not have precipitated. India stood unscathed, mainly because the rupee was not a freely exchangeable currency.

Moreover, there is no conclusive empirical evidence to prove that CAC is necessary for smooth and rapid economic growth and development. In a cross-country study, Dani Rodrik of Harward has found little correlation of per capita income growth, investment and inflation with capital account convertibility. In another study, conducted by Prasad, Eswer, Kenneth Rogoft, Shang Jin and M Ayhan of IMF, they failed to find evidence that a complete absence of controls brings faster growth or other economic benefits. Hence, there are no apparent gains of FCAC, but, there is every likelihood that it would lead to a worst crisis.

It is no secret that India’s external sector was quite vulnerable till recently before the sudden respite in oil prices. The current account deficit last year in 2012-13 it self was above the comfort level of 2.5 per cent of the gross domestic product. It was 4.2 per cent of gross domestic product (GDP) in 2011-12 and rose to 4.7 per cent in 2012-13. Only after severe curbs, including restrictions on import of precious metals and unprecedented fall in oil price, the deficit fell to 1.7 per cent in 2013-14. In 2014-15, it stayed low, with the third quarter showing a deficit of 1.6 per cent, solely due to respite in the oil prices.

The fiscal situation is though partly under control, yet, it continues to be fragile. The fiscal deficit of the central government had been 4.6-6.5 per cent in the past six years, before falling to 4.1 per cent in 2013-14. The government is committed to keeping the fiscal deficit low and the target of 3.9 per cent has been retained for this year. The deficit target is being scaled down to 3.5 and three per cent in 2016-17 and 2017-18, respectively.

   Any imminent move towards further opening up of the capital account is unwarranted, as the RBI had tough time to regulate the debt market movements.

These are the debt markets where most of the capital account restrictions do lie and would go with FCAC. The RBI had tough time to manage this market over the past 12-18 months. The overall limit for foreign inflows into government debt has remained static at $30 billion since 2013. This limit was fully used up last year when foreign investors rushed to buy Indian debt on the expectation that falling inflation and lower interest rates in the economy would be positive for gains in bonds. Since then, the foreign institutional investors have (FII’s) actively lobbied for a revision of that limit, and the RBI has not relented. The inflows into corporate bonds are also restricted at $51 billion and this hasn’t changed recently either. But, all such restrictions would have to go away with FCAC. All these limits on inflows were crucial according to the RBI which has pointed that without these limits the potential for volatility in debt flows was high at a time when the US was starting to normalize monetary policy. Moreover it wasn’t just the quantum of inflows that the RBI has continued to restrict. The central bank had also to micro-manage the nature of flows. Even, very recently, in the February 2015 itself, the RBI had to ban incremental investments from foreign investors into commercial paper, just due to the short-term nature of these investments. The fear was that any time on a sudden outflow of funds from this market due to global reasons could lead to an unwarranted spike in corporate funding costs.

A similar precautionary decision had been taken regarding foreign investments in government treasury bills in April 2014 following the experience of August-September 2013. At that time, heavy selling from FIIs in government debt, particularly short-term debt, had led to a sharp fall in the Indian rupee, leading to several ramifications in the economy. So, a liaising fair policy towards the capital account would be precarious. 

Rather, as the things stand, all future investments from the foreign institutional investors (FIIs) into Indian debt will need to have been regulated well with a minimum residual maturity of three years.

With respect to the external commercial borrowings too, the RBI had to  kept a strict watch on these. There are sectoral limits in place, restrictions on the cost at which such debt can be raised and what it can be used for. The central bank has not opted to announce any significant liberalization in recent years inspite of such a demand. Then, how all these regulation be allowed to with FCAC.

 Indeed, India’s economic fundamentals have to be far more robust, and the global environment more benign with lesser turbulence, before the country can consider further easing of the restrictions on debt flows. Moreover, same is true for capital investments too.

Where is the need for the FCAC, when the economy is already growing at 7.4 percent p.a. without FCAC. Even if the proposed move is intended to facilitate foreign investments, though they are not going to benefit us in any way and are bound to harm in the long run with growing repatriations, yet the economy is receiving the foreign investment too steadily to bridge the current account deficit, though that is also quite unhealthy practice. Moreover, the China is receiving even more FDI than us while it has even not moved for market determined exchange rates then what to talk of capital account convertibility. Even, the RBI's attempt to appoint the Tarapore committee II a decade ago to draw a road map for FCAC was a futile and unwarranted attempt as the pre-conditions laid by the committee a decade ago, are yet quite distant. Indeed, FCAC would allow unrestricted conversion of the rupee assets into any currency (dollar, pound, euro or any other currency) at the going exchange rate. It would empower the citizens to convert their monetary assets into currencies of their choice. The foreign direct investors too would be free to take out their money any time without any restrain or charge.  Indian citizens, companies and banks would also become free to invest, speculate and borrow (even for non-productive speculations) in any currency.

            It may also be true under certain context that the FCAC is the mark of well-matured economy but has our economy matured for the FCAC is a big (?) question mark. Even China, having a robust trade surplus of $380 billion (almost equal to our total expoets) and cushioned with a voluminous pile of $ 4 trillion forex reserves has no intent to move  for the CAC. It has even not thought of a market determined exchange rate in spite of such a thick pile of forex reserves and towering trade surplus, where we are below the benchmark and both are to our disadvantage. China had not at all cared for the Euro-American pressure and displeasure when we were complying to the Fund-Bank sponsored structural adjustment, and kept its currency fixed at 8.28 Yuan to the US dollar from 1994 to 2005. It helped China to bring down its inflation from 25 to around 2 percent. Thereafter, in the past one decade too it had a calibrated exchange rate management and allowed to appreciate its Yuan to 6.19 Yuan per dollar in such a calibrated manner to use exchange rate management as a fire wall against any imminent dollar driven or the exchange rate driven inflation. In comparison to china, when  our exports are one sixth of that of the china and exchange reserves are just around one tenth of the China's and to the contrary, we have a wide trade deficit too. The  free  given in early 90s float to the Re and convertibility of currency granted earlier in trade, current and partly in capital account too has not gave use any edge. In addition to this, if we have a look upon the large share of vulnerable receipts in our forex reserves, all time high trade and fiscal deficits, growing hold of foreign institutional invertors (FII's ) on our stock markets and the psyche of Indian elites, the FCAC appears to prove to be the biggest misadventure, if brought about. Rather it would be a boon to paint black money stashed abroad as white by round-tripping.

Need for a quicker Turnaround with Better Regulatory convergence

Reckless leveraging to generate imaginary wealth by fake financial innovations, leading to the present crisis has once again raised doubts about the credibility and reliability of the credit raters and the global financial regulatory  system, including the central banks of crisis ridden countries. The subprime in the US would not have permeated to the entire financial sector, but, the securitization of home mortgage loans coupled with the flow of foreign funds into the US Fed and the US government sponsored firms like Fannie Mae and Freddie Mac, finding its way to credit markets has led to reckless leveraging.

This reckless leveraging out of foreign funds has fuelled a debt financed and import driven consumer binge in the U.S., whereby the US consumers could spend $500-800 billion over and above their GDP for last seven years. Now, almost $3 trillion worth of mortgage backed securities in the U.S. and another $2 trillion worth of these securities have gone sublime in Europe. In view of such a huge meltdown out of incredible leveraging, a multilateral regulatory regime has to be put in place to assess the asset base and sustainability of securitization, absorbing global investments.

However, on the macro-economic front in case of India, the trade deficit might breach the $100 billion mark and the current account deficit may touch 3.5 percent of our GDP, worse than 1991-92, when India had to pledge gold with the Bank of England. Fiscal deficit might also touch 5 percent of our GDP, double of budgeted target of 2.5 percent and 40 percent above the limit of 3 percent fixed under the fiscal Responsibility and Budget Management Act.

Now, when almost in all parts of the world, the tremors of recession are being felt out of this crisis, a quicker turnaround has to be ensured. In this regard, India should plan to channelise its surplus savings to demand generating investments, instead of further opening up of the financial sector (including the insurance), the educational sector and other services for foreign direct investments. Indigenous resources, available shall have to be channelised for fresh investments and demand creation, for sustainable inclusive growth in the long run.