Home » PERFORMANCE OF INTEREST SUBVENTION IN FARMING
PERFORMANCE OF INTEREST SUBVENTION IN FARMING
GS 3, MAINS: Issues related to direct and indirect farm subsidies and minimum support prices; Public Distribution System objectives, functioning, limitations, revamping; issues of buffer stocks and food security; Technology missions; economics of animal-rearing.
To ensure that millions of small and marginal farmers (India has a total of around 120 million farmers) are not at the mercy of moneylenders, or other expensive sources of finance, the government has, historically, mandated that banks ensure that a certain share of their lending is to these farmers.
Currently, 18% of all bank lending has to be mandatorily lent to the agriculture sector. And, to ensure farmers get loans at low rates of interest, the government pays a certain proportion of the interest to banks directly while farmers pay the rest.
This interest subvention cost the government Rs 13,045 crore in FY18 and, as compared to that, the FY20 budget target is 37% higher at Rs 18,000 crore.
A report by an RBI internal working group on agriculture credit, however, points to major problems in how the scheme is working; in which case, the government probably needs to look at completely recasting it.
The good news here, of course, is that while formal bank credit was just around 10% of total farm credit in 1951, this is up to around 70% today.
WHAT IS INTEREST SUBVENTION?
Interest subvention is hence the subsidy offered on interest rates. For instances, interest subvention is offered on several lending schemes by the government to promote a particular industry.
This implies that with the subsidy in hand, the loan borrower has not to pay total interest on loan amount and the balance interest amount is borne by the government.
Thus, interest subvention is a form of waiver of some percentage of interest that promotes some particular industry and general public interest.
Government of India has come up with an array of interest subvention schemes for different sectors spanning from agriculture, education, handlooms, export-oriented sectors to housing sectors.
INTEREST SUBVENTION FOR FARMERS:
The Central Government provides to all farmers for short term crop loan upto one year for loan upto Rs. 3 lakhs borrowed by them.
Under this scheme, the farmers can avail concessional crop loans of upto Rs.3 lakh at 7 per cent rate of interest. It also provides for an additional subvention of 3 per cent for prompt repayment within a period of one year from the date of advance.
The scheme will help farmers to avail short term crop loans up to Rs. 3 lakh payable within one year at only 4 per cent per annum. In case farmers do not repay the short term crop loan in time they would be eligible for interest subvention of 2% as against 5% available above.
As a measure to check distress sale, post-harvest loans for storage in accredited warehouses against Negotiable Warehouse Receipts (NWRs) are available for upto 6 months for KCC holding small & marginal farmers. The Interest Subvention Scheme will continue for one year and it will be implemented by NABARD and RBI.
To provide relief to the farmers affected by Natural Calamities, the interest subvention of 2% will be provided to Banks for the first year on the restructured amount. Such restructured loans will attract normal rate of interest from the second year onwards as per the policy laid down by the RBI.
PROBLEMS INHERENT IN THE SCHEME:
The concessional farm credit that is given by commercial banks, mostly in the public sector, is many times greater than the inputs bought by farmers; in which case, what are the loans being taken for?
Since the loans are at vastly subsidised rates, they are probably being diverted to non-farm users; it is not clear if this is done by bank managers alone, or whether the farmers are also part of the deal. So, RBI found that in Andhra Pradesh, the total bank credit going to the farm sector is 7.5 times the cost of inputs bought by farmers.
On the other hand, farmers in Jharkhand, the north-eastern states, West Bengal, Chhattisgarh, Bihar, Odisha, Maharashtra, Uttar Pradesh, and Rajasthan are not getting credit even to meet their input requirements.
The RBI study also found that while livestock, forestry, and fisheries contributed around 38-42% of agriculture output during 2014-16, this sector got just 6-7% of total agriculture credit; clearly, this is an issue that needs addressing.
Nor is it clear that small and marginal farmers are getting the loans; most of the loans, it appears, are being cornered by large farmers. In Bihar, for instance, small and marginal farmers were 13% of the total population in the state, but received just 3% of the loans disbursed.
Equally worrying, the loan policy has resulted in a situation where short-term crop loans now comprise 75% of all agriculture credit as compared to 51% in even 2000. In other words, long-term investment in agriculture is getting compromised; at a time when overall investments in agriculture are slowing and, within this, the share of the government has fallen even more sharply, this needs to be corrected.
Ideally, the government should stop the practice of subsidised loans, and instead, give the subsidy directly to farmers through DBT; once subsidised loans are not available from the banks, the practice of phantom loans will also stop.
Over time, all agriculture subsidies should be trimmed, and money should be invested in creating irrigation, or other facilities that benefit the sector more.
PREVIOUS YEARS UPSC MAINS QUESTIONS:
How do subsidies affect the cropping pattern, crop diversity and economy of farmers? What is the significance of crop insurance, minimum support price and food processing for small and marginal farmers? (2017)
Explain various types of revolutions, took place in Agriculture after Independence in India. How these revolutions have helped in poverty alleviation and food security in India? (2017)
Livestock rearing has a big potential for providing non-farm employment and income in rural areas. Discuss suggesting suitable measures to promote these sectors in India. (2015)
In view of the declining average size of land holdings in India which has made agriculture non-viable for a majority of farmers, should contract farming and land leasing be promoted in agriculture? Critically evaluate the pros and cons. (2015)
How can the ‘Digital India’ programme help farmers to improve farm productivity and income? What steps has the Government taken in this regards? (2015)
“In the villages itself no form of credit organisation will be suitable except the cooperative society.” – All Indian rural credit survey. Discuss this statement in the background of agriculture finance in India. What constrain and challenges do financial institutions supplying agricultural finances? How can technology be used to better reach and serve rural clients? (2014)