enhancingInvCreditAgri PDF

Institute for Financial Management and Research
Centre for Development Finance

Working Paper Series
August 2006
Enhancing Investment Credit in Agriculture
Rajiv Panthary
Rajiv Panthary (rajiv.panthary@icicibank.com) is Chief Manager working with the Non Farm &
Rural Infrastructure Finance team of ICICI Bank. The views expressed in this note are entirely
those of the author and do not in any way reflect the views of the Institutions with which he is
associated. The author wishes to thank, Mr. D Chattanathan, Assistant General Manager and
head of Rural Infrastructure Finance for the invaluable guidance and help in preparation of this
paper.
.
Panthary : Enhancing Investment Credit in Agriculture
Contents
1 Background 6
1.1 Agricultural Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.2 Comparison of Rural V/S Urban Credit Deposit (CD) Ratio . . . . . . . . . . 7
1.3 Institutional Credit Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.4 Short Term versus Investment Credit . . . . . . . . . . . . . . . . . . . . . . . 12
1.5 Special Agriculture Credit Plans (SACP) Performance by Public Sector Banks 13
1.6 Region/State-wise Credit Disbursement . . . . . . . . . . . . . . . . . . . . . 14
1.7 Public versus Private Investment in Agriculture . . . . . . . . . . . . . . . . . 15
2 Current status of Agriculture: Economy and Investment 17

2.1 Growth Rate of Agriculture vis-a-vis Economy . . . . . . . . . . . . . . . . . . 17
2.2 Capital Formation in Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.3 Need for enhancing Investment in Agriculture . . . . . . . . . . . . . . . . . . 19

2.4 Transformation of Indian Rural Economy: Drivers of change . . . . . . . . . 20
3 Future trajectory in Agriculture 27

3.1 Subsidy - Not a Panacea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.2 Reforming Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3.3 Risk Mitigation through Insurance . . . . . . . . . . . . . . . . . . . . . . . . 30
4 Recent Innovations in Rural Arena 34

4.1 Collective Action in the Management of Irrigation Systems . . . . . . . . . . 34
4.2 Franchisees for rural power collections . . . . . . . . . . . . . . . . . . . . . . 36
4.3 Localized/Distributed generation of power. e.g., Desi power . . . . . . . . . . 38
4.4 IT and Supply Chain Management in Agriculture . . . . . . . . . . . . . . . . 39
4.5 Leveraging Mandi Cess for Funding of Roads in Madhya Pradesh . . . . . . 40
4.6 Unlocking Values through Integration. e.g., Poultry . . . . . . . . . . . . . . 41

4.7 Uttaranchal - Participatory Horticulture Development . . . . . . . . . . . . . 42
4.8 Supply Chain Solution for Horticulture Produce . . . . . . . . . . . . . . . . 43
4.9 NDDB’s Terminal Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
4.10 Apni Mandis in Punjab . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
4.11 HLL’s Shakti project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
4.12 Specialized institutions. e.g., PAIC . . . . . . . . . . . . . . . . . . . . . . . . 45
2
4.13 Contract Farming and Credit Bundling . . . . . . . . . . . . . . . . . . . . . . 46

4.14 Weather Insurance. e.g., ICICI Lombard . . . . . . . . . . . . . . . . . . . . . 46
4.15 Rural Housing - Computerization of Land Records - Karnataka . . . . . . . 47
4.16 Watershed Project by NABARD . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
5 Benchmarking with International Experiences 48

5.1 Private Rail Franchisees in UK . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
5.2 Guatemala: Gensis Empresarial (GE) . . . . . . . . . . . . . . . . . . . . . . . 48
5.3 Leasing and Hire Purchase Models. e.g, Kenya Solar PV . . . . . . . . . . . . 49
5.4 Utilities Extending Credit. e.g., Chilean Rural Electrification Program . . . . 50
5.5 Tradable Water Rights and Resource Allocation - Chile’s Experience . . . . . 50
5.6 Teba Bank in South Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
5.7 Rural Bank of Panabo in Philippines . . . . . . . . . . . . . . . . . . . . . . . 52
5.8 Floriculture Finance in Zimbabwe . . . . . . . . . . . . . . . . . . . . . . . . . 53
5.9 Bundling Credit and Insurance in Pakistan . . . . . . . . . . . . . . . . . . . 54
5.10 Cattle Financing in Columbia . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
5.11 Banking Correspondents (BCs) in Brazil . . . . . . . . . . . . . . . . . . . . . 55
5.12 The Chinese Experience of Town and Village Enterprises . . . . . . . . . . . 55
5.13 Saving the Forest with a Timber Lease in Guyana . . . . . . . . . . . . . . . 56

5.14 Indonesian Experience for Funding Maintenance of Irrigation Projects . . . 57
5.15 Private Sector Rehabilitation & Management in China . . . . . . . . . . . . . 58
5.16 Indian versus Korean Irrigation Agencies - the Human Resources Aspect . . 58
5.17 Supporting Environment for WUAs in the United States . . . . . . . . . . . . 60
5.18 Lease Contract in Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
5.19 Joint Funding of R&D by Private Parties and Government in Australia . . . 61
5.20 Community Participation in Rural Roads . . . . . . . . . . . . . . . . . . . . . 62
6 Scope of Scaling and Barriers to Scale 63
7 Focus areas for enhanced investments 64

7.1 Food processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
7.2 Irrigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
7.3 Post Harvest including warehousing and cold storage . . . . . . . . . . . . . 66

7.4 Provision of Basic Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . 68
3
8 Enabling Mechanisms for enhancing Investment Credit Flow 71

8.1 Promotion of PPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
8.2 Enabling Provisions for Attracting Private Investment/Industry . . . . . . . 71
8.3 Desired Regulatory Changes in Banking Sector . . . . . . . . . . . . . . . . . 72
8.4 Restrictive Lending Environment for Private Sector Banks . . . . . . . . . . 74
8.5 Enabling greater access to financial services . . . . . . . . . . . . . . . . . . . 74

8.6 Other Suggestions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
4
Executive Summary
The pace and pattern of Investment credit in the country needs to be enhanced in order
to achieve projected growth rate of 5-7 percent in agriculture. Certain definitive changes
in the agriculture domain such as increased share of non-farm sector in rural income,
diversion from food grain crops to value added crops necessitates higher flow of invest-
ments in the agriculture sector. The paper discusses the current trend of investment
credit in the country reflecting on the status and the existing pattern of investment credit
flow in agriculture.
Apart from discussing the current trends in the investment credit the paper dwells
on market led innovations in the rural sector that have led to increased participation of
private parties and potentially offer opportunities for enhancing investment credit flow.
A few international innovations for delivery of services in the rural areas have also been
discussed with the objective of possible replication in the Indian context. The paper also
highlights emergence of few focus areas in the rural landscape, which would require en-
hanced credit flow. After discussions with experts in the area it is felt that for accelerated
development of agriculture economy increased investment would be required in providing
last mile connectivity up to the village level in terms of roads, power and telecommunica-
tion network apart from higher investment in sectors such as food processing, irrigation,
post harvest infrastructure and R&D. There would be need for higher public and private
investments to affect the same. A few enabling mechanisms for directing higher invest-
ment credit in agriculture sector have also been highlighted in the note.
5
1 Background
With around 2/3rd of the rural population directly or indirectly dependant on agriculture
for livelihood support, agriculture continues to play a dominant role in the Indian econ-
omy. Even though the contribution of agriculture to Gross Domestic Product (GDP) has
declined1 from 44.5 per cent in 1970-71 to 22.2 percent in 2003-04, the performance
of Indian economy continues to be affected by the growth rate of Indian agriculture. A
decline in the agriculture growth rate has its reflection in the overall economy of the
country. For instance, the negative growth of 4.4 per cent in the year 2002-03 had direct
fallout on the Indian economy, which declined from 5.6 per cent during 2001-2 to around
3.7 per cent in 2002-03. The Tenth Plan (2002-2007) has set an ambitious average GDP
growth of 8 per cent per annum. An annual average growth of 7.0 per cent from agricul-
ture sector alone in the next five years is crucial for achieving the GDP target. To achieve
this, it is important to revitalize the agricultural sector, which necessitates investment

flow in to the agriculture sector. In order to assess the ways and means of increasing the
investment flow an effort has been made to understand how agriculture credit has grown
over the years and the emerging trends in the rural space.
1.1 Agricultural Credit
A large number of agencies, including cooperatives, regional rural banks, commercial
banks, non-banking financial institutions, self-help groups and a well spread informal
credit outlets together represent Indian rural credit delivery system. The Task Force
on Rural Credit for the Tenth Plan has projected institutional credit flow to agriculture
and allied activities at Rs 7365.70 billion for 2002-2007, which is more than treble (320
per cent) the credit flow (Rs 2298.53 billion) during the Ninth Plan (1997-2002). The
country has an extensive outreach of rural and semi-urban branch network of commercial
banks (around 33,000), cooperative banks (about 0.1 million) and RRBs (about 14,000).
However, despite that the actual flow of credit to agriculture from formal rural financial
institutions (RFI) has fallen short of projected targets. In the first 3 years of the 10th
plan the credit flow is estimated to be 2500.60 billion, which leaves a gap of Rs. 4865.10
billion to be filled in another 2 years.
1 See report of V Jagan Mohan - Bridging the banking divide indiatogether.org/2004/apr/eco-ruralbank.htm
and icicisocialinitiatives.org papers on the issue.
6
Credit Flow for Agriculture and Allied Activities2

Credit Flow for Agriculture and Allied Activities (Figures in Rs. billion)
Agency 1999-00 2000-1 2001-2* 2002-3* 2003-4 2004-05 (P)
Co-operative Banks 182.60 207.18 235.24 236.36 271.83 356.78
Regional Rural 31.72 42.20 48.54 60.70 69.81 91.62

Banks
Commercial Banks 247.33 278.07 335.87 397.74 457.43 600.38
Other Agencies 1.03 0.82 0.80 0.80 0.92 1.20
Total 462.68 528.27 620.45 695.60 800.00 1005.00
The ratio of agricultural credit to agricultural GDP increased from 5.4 percent in 1970s to
8.7 percent in 2001-02, yet agricultural credit as a proportion to total credit has reduced
from 20.5 per cent to 10.5 per cent during the same period indicating lower deployment
of credit in agriculture vis-a-vis the overall credit off take.
Ratio of agricultural credit to agricultural GDP and Total Credit3

Ratio of agricultural credit to agricultural GDP and Total Credit
Period Agricultural credit as a ratio Agricultural credit as a ratio

to Agricultural GDP to total credit
1970s 5.4 20.5
1980s 8.3 20.1
1990s 7.4 14.4
2001-02 8.7 10.5
1.2 Comparison of Rural V/S Urban Credit Deposit (CD) Ratio
Being primarily an agrarian economy with the majority of Indian population dependant
on agriculture and its allied activities, agriculture credit is of prime importance to the
country. However, an insight into Credit/Deposit (CD) ratios prevalent in rural and semi-
urban centers present not so encouraging situation. As on March 2003,4 as against
national average of 59.3 percent the Credit/Deposit (CD) ratio in the rural and semi-
urban centers stood at 42 percent and 35 percent respectively (the CD ratio at the same
time was 69.5 percent for urban centers - inclusive of metro centers). The ratios at metro
and top 100 urban centers at the same time are as high as 83 percent and 74 percent
2 Source: NABARD Annual Report, 2002-03 * NABARD as appearing in interim Vyas Committee Report
3 Source: Handbook of Statistics, 2002-03, RBI
4 See report of V Jagan Mohan - Bridging the banking divide (indiatogether.org/2004/apr/eco-ruralbank.htm)
7
respectively. It would be pertinent to note that, at the time of nationalization, June 1969,
the credit indicators of banks’ rural and semi-urban branches were 37.2 percent and
39.7 percent respectively which peaked to 57.7 percent and 49.1 percent at the end of
June 1981. However post reforms period the CD ratio has come down almost to the 1969
levels despite continued thrust on enhancing agriculture credit off take.
8
Banking Profile at metro /urban/semi urban /rural/ RRBs5

Banking Profile at metro /urban/semi urban /rural/ RRBs as on March 2003
No of bank Deposits Credit (Rs. Credit / de-

Branches (Rs. billion) billion) posit ratio
(%)
All India 66,436 12,786.67 7,592.10 59.3
Metro Centers 8,664 5,718.52 4,744.61 83.0

(13.0%) (44.8%) (62.0%)
Top 100 centers inclu- 15,066 7,802.91 5,759.46 74.3

sive of metro centers
(22.6%) (61.0%) (76.0%)
Urban centers inclusive 19,379 8,618.75 5,997.51 69.5

of metro and other cen-
ters
(29.0%) (67.0%) (79.0%)
Semi-urban centers 14,813 2,405.23 846.83 35.0

(22.0%) (19.0%) (11.0%)
Rural centers 32,244 1,762.68 747.75 42.0

(49.0%) (14.0%) (10.0%)
Regional rural banks 14,462 497.78 220.68 44.0

(21.0%) (4.0%) (3.0%)
Combined CD ratio of banks at semi-urban and rural centers 38
It may be noted from above that the rural/semi-urban sector fare poorly in comparison
to the urban India in terms of CD ratio, which indicates higher mobilization of savings
in the rural/semi-urban branches with less than proportionate deployment of credit. In
comparison there is higher deployment credit in the urban areas (69.5 percent) with
higher concentration in metro centers (83.0 percent). For a balanced and comprehensive
growth, there is need to ensure that efficient utilization of capital is done in rural areas
by creation of local opportunities across sectoral dimensions. Availability of viable oppor-
tunities in rural vicinity would also keep tab on migration from rural to urban areas. US
effectively built economies in the Suburbs during the sixties. This in effect reduced the
migration to urban areas, which led to the development of the overall economy including
5 Source: RBI quarterly handout
9
the rural areas. The same can be replicated here which would lead to creation of eco-
nomic activity in the rural areas. These rural local economies can act as feeders to the
requirements of urban areas mutually reinforcing the relationship. This would warrant
a huge investment in the creation of good infrastructure in terms of road, power, and
communication including logistics.
1.3 Institutional Credit Trends
Institutional credit stands at around 64 percent of the total rural credit. Post national-
ization of banks, there has been conspicuous increase in the flow of direct institutional
credit by the scheduled commercial banks to agriculture and allied activities. Institu-
tional credit registered an increase of 7.6 percent per annum during the period 1970-71
to 1990-91 (credit flow during the period increased from Rs.7.44 bn to Rs.98.29 bn). The
credit flow has further increased to Rs.413.85 bn in 2001-02. A source wise analysis of
credit flow reveals that the share of cooperatives has come down considerably from 98
per cent in 1971-72 to 44 per cent in 2001-02. The share of SCBs however improved from
1.9 per cent to 45 per cent during the same period. The RRBs, which came into existence
in 1975-76, have a share of 11 per cent.
The amount of outstanding advances to agriculture by public sector and private sec-
tor banks has increased continuously over the years in absolute terms, however, there
continues to be a shortfall in terms of achieving agriculture lending targets (18 per cent
of net bank credit). Total agriculture advances outstanding by the public sector banks
increased from Rs. 212.04 billion in March 1994 to Rs.735.07 billion in March 2003
growing by 14.81 percent (annually compounded). The direct agriculture advances in
the same period increased from Rs.192.56 billion to Rs.517.99 billion (annually com-
pounded growth of 11.62 percent) while indirect agriculture advances increased from
Rs.19.49 billion to Rs.217.08 billion (annually compounded growth of 30.71 percent).
During the same period, total agriculture advances outstanding by the private sector
banks increased from Rs.5.91 billion in March 1994 to Rs.118.73 billion in March 2003
growing by 25.13 percent (annually compounded). The direct agriculture advances in
the same period increased from Rs.5.15 billion to Rs.52.01 billion (annually compounded
growth of 29.30 percent) while indirect agriculture advances increased from 0.76 billion
to Rs.66.71 billion (annually compounded growth of 64.41 percent). Out of the total agri-
culture advances under the private sector banks the major contribution in the year 2003
10
has been from ICICI Bank, which evolved a new dimension to credit dispensation in the
rural sector by having a focused approach and taking technology to the doorstep of the
farmers.
Outstanding credit to agriculture6

Outstanding credit to agriculture by public sector and private sector banks (Rs. In bn)
March 1994 March 2003 Annual com-

pounded
growth rate
(percent)
Public sector banks
Net bank credit 1409.14 4778.99 14.53
Total agriculture advances 212.04 735.07 14.81

outstanding
Direct agriculture advances 192.56 517.99 11.62
Indirect agriculture advances 19.49 217.08 30.71
Private sector banks
Net bank credit 95.45 717.61 25.13
Total agriculture advances 5.91 118.73 39.57

outstanding
Direct agriculture advances 5.15 52.01 29.30
Indirect agriculture advances 0.76 66.71 64.41
The share of agriculture lending in scheduled commercial banks’ total outstanding

credit as on March 2003 stood at Rs.853.80 billion out of total net bank credit of Rs.
5496.6 billion. This works out to be 15.5 percent as against targeted level of 18 percent.
There has been a default in terms of achieving the Agriculture lending target by a majority
of the public sector and the private sector banks as is suggested from the figures below.
6 Source - RPCD, RBI
11
Banks achieving Agriculture lending targets7

No of banks achieving Agriculture lending targets
As on the last re- Public sector banks Private sector banks

porting Friday of
Achieving the Not achieving Achieving the Not achieving
18% target the 18% target 18% target the 18% target
March 2001 4 23 1 30
March 2002 6 21 2 29
March 2003 5 22 2 29
The contribution in the corpus of Rural Infrastructure Development Fund (RIDF) of

NABARD has been coming from the banks with shortfall in priority sector lending. Nine
tranches of RIDF have been established with an aggregate corpus of Rs. 420.00 bn.8 As
at the end of March 2004 sanctions under all tranches of RIDF amounted to Rs.346.78
bn against which disbursements were Rs.210.67 bn.
1.4 Short Term versus Investment Credit
As per the Expert Committee on Rural Credit (Prof. Vyas Committee) the aggregate short-
term credit9 growth rate hovered around 14 per cent during the three decades, while
aggregate growth rate of investment credit declined from about 20 per cent in the 1970s
to about 12 per cent in the 1990s. The decline in investment credit is sharper (from 29.9
percent in 1970s to 12.1 percent in 1990s) in case of the commercial banks.
Decadal Average Growth Rate10

Decadal Average Growth Rate of Direct Institutional Credit to Agriculture and Allied Activities
Period Cooperatives RRBs Commercial Banks Total
Short- Long- Short- Long- Short- Long- Short- Long-

term term term term term term term term
1970s 10.6 13.9 334.8 426.8 28.2 29.9 14.5 20.2
1980s 12.5 11.0 19.8 18.5 16.3 18.6 13.9 14.8
1990s 11.9 13.1 32.7 10.6 17.8 12.1 14.6 11.9

7 Source - RPCD, RBI
8 Source-NABARD website (www.nabard.org.in)
9 The banks purvey two types of credit i.e. short-term credit for seasonal agricultural operations and invest-
ment credit (medium term and long term loans for creation of assets.)
10 Source: Handbook of Statistics, 2002-03, RBI
12
1.5 Special Agriculture Credit Plans (SACP) Performance by Public

Sector Banks
The flow of credit to the agricultural sector by public sector banks increased from Rs.101.72
billion in 1995-96 to Rs.339.21 billion during 2002-03 under the SACP.11 Investment
credit to agriculture by public sector banks under Special Agricultural Credit Plans
(SACP) was Rs.78.31 billion during 2002-03, which had grown by 7.46 percent over the
previous year levels (Rs.72.87 billion). However the growth in investment credit is quite
low in comparison to growth of production credit (19.07 percent), indirect lending (7.04
percent) and overall credit to agriculture. Upon analysis of decadal growth rate of insti-
tutional credit we find that short-term credit has stagnated at 14 percent since 1970s
while long-term credit growth has decelerated from 20 percent to 12 percent as capital
formation in agriculture has reduced.
11 SACPs have been introduced with the objective of improving flow of credit to agriculture sector. SACP take
into account the figures on disbursements made during a year rather than on outstanding.
13
Disbursement of credit to agriculture under SACP (Rs. In billion)
Production Investment Total direct Indirect Total dis-

credit credit lending lending bursement
(2+3) (4+5)
1 2 3 4 5 6
1995-96 49.51 40.39 89.90 11.81 101.72
1996-97 61.64 48.96 110.60 17.21 127.82

(24.51%) (21.21%) (23.02%) (45.70%) (25.66%)
1997-98 72.99 53.73 126.72 21.36 148.08

(18.40%) (9.74%) (14.57%) (24.06%) (15.85%)
1998-99 82.04 60.62 142.66 35.21 177.87
(12.40%) (12.83%) (12.58%) (64.82%) (20.12%)
1999-00 99.03 61.19 160.22 58.90 219.13

(20.71%) (0.96%) (12.31%) (67.26%) (23.18%)
2000-01 116.15 68.18 184.33 62.20 246.54

(17.29%) (11.41%) (15.04%) (5.62%) (12.51%)
2001-02 153.85 72.87 226.73 66.59 293.32

(32.46%) (6.89%) (23.00%) (7.04%) (18.97%)
2002-03 183.19 78.31 261.50 77.70 339.21

(19.07%) (7.46%) (15.33%) (16.70%) (15.64%)
1.6 Region/State-wise Credit Disbursement
The imbalance in growth of agriculture credit is apparent in the disbursement pattern

among regions by the banks. The Southern region (accounting for 43.8 percent of the
total disbursement in the year 2001-02) is clearly the favorite in securing agriculture
credit from all categories of banks. The disbursement to northern region registered an
increase from 12.9 percent of total disbursement in the year 1990-91 to 19.9 percent in
the year 2001-02 while share of Eastern region declined from 8.3 percent to 7.4 percent
and Central region declined from 16.9 to 14.1 during the same period. The share of
North-Eastern region continues to remain at an abysmally low level.
14
Disbursement of loans12
Disbursement of loans for Agriculture and Allied Activities (ST and LT)
- Share in Total Disbursements (%)
Region/State 1990-91 1995-96 2001-02
Northern Region 12.9 11.6 19.9
North-Eastern Region 0.4 0.4 0.5
Eastern Region 8.3 6.4 7.4
Central Region 16.9 16.4 14.1
Western Region 13.6 17.1 14.4
Southern Region 47.9 48.0 43.8
All-India 100.0 100.0 100.0
1.7 Public versus Private Investment in Agriculture
Public Sector investments in agriculture had increased from Rs.39.19 bn during 2000-01
to Rs.47.94 bn during 2001-2002, in sharp contrast to the previous negative trend. The
private sector investments in agriculture and allied sectors also witnessed an increase
from the levels of Rs.146.05 bn during 1995-96 to Rs.242.57 bn during 2000-2001 at
current prices. The proportion of such capital formation financed by institutional credit
grew from 59.6 to 71.5 per cent during the period between 1995-96 and 2000-01.
However the supply of formal financial services within India is still way behind the
actual requirements. As against an estimated demand13 for credit ranging from $3.00
to $9.00 billion annually the formal sector is barely able to provide $200.0 to $300.0
million, less than 20 percent of rural populations have a bank account, against a to-
tal of over 600,000 villages there are barely 30,000 bank branches and while products
such as health insurance are completely inaccessible to the poor even the most basic life
insurance products remain out of reach. As of now access of credit to rural areas is con-
centrated in few pockets with remote locations still relying on the informal sources. This
gap of credit needs to be bridged in order to secure balanced regional growth, ensuring
higher deployment of credit for agriculture (including the allied sector) and particularly
increased investment credit to cater to the demand unleashed by changing trends in agri-
culture post reforms period. It has to be reinforced here that agriculture and services can
12 Source RPCD, RBI
13 Refer: ICICIsocialinitiatives.org paper, “A Blueprint for the Delivery of Comprehensive Financial Services to
the Poor in India” by Bindu Ananth, Bastavee Barooah,Rupalee Ruchismita, Aparna Bhatnagar
15
no longer be seen in isolation, with each fuelling the demand for the other. The con-
tribution of services sector in the rural economy in the recent times has been growing
significantly14 (more in sync with the changing character of Indian economy.)
14 CERG Advisory Private limited report on the changing character of Rural India for ICICI Bank.
16
2 Current status of Agriculture: Economy and Invest-
ment
2.1 Growth Rate of Agriculture vis-a-vis Economy
Agriculture and allied sector continues to be mainstay of rural populace and thus has a
significant bearing on the overall growth of economy and poverty reduction. GDP15 from
agriculture sector is estimated to have declined in the year 2002-03 at the rate of (-) 4.4
percent as against previous year’s rate of 5.7 per cent during 2001-02. This had a direct
bearing on the GDP of the Indian Economy, which declined from 5.6 percent in 2001-02
to 3.7 per cent during 2002-03.
Select Economic Indicators16

Select Economic Indicators
S. No. Economic Indicators 2000-01 2001-02 2002-03 P
1 Growth in overall real GDP 4.4 5.6 3.7

(%)
2 Growth in GDP from agricul- (-) 0.4 5.7 (-) 4.4

ture & allied sectors (%)
3 Growth in agricultural pro- (-) 5.7 5.9 (-) 12.0

duction (%)
4 Growth in food grains Pro- (-) 5.2 6.8 (-) 13.2

duction (%)
2.2 Capital Formation in Agriculture
Given the importance of agriculture in propelling a steady growth rate of Indian economy
and the rising demand in view of changing trends in agriculture, there would be need to
enhance capital formation in Indian agriculture. In the year 2002-03, the share of public
sector and private sector in total capital formation stood at 23.9 per cent and 76.1 per
cent respectively out of a total of Rs.182.40bn. There has been a decline in the private
investment share in capital formation in agriculture from 76.1 percent in 2002-03 to 74.4
percent in 2003-04 (as per the quick estimates for the year 2003-04) 1-02.
15 Source NABARD (www.nabard.org)
16 Sources: (1) Monthly Review of Indian Economy, CMIE, June 2002, (2) Economic Survey 2002-03
17
Gross Capital Formation17

Gross Capital Formation in Indian Agriculture (at 1993-94 prices) (Rs. In billion)
Percent share
Year Total Public Private Public Private Investment
in Agricul-
ture as
percent of
GDP
1999-00 173.04 42.22 130.82 24.4 75.6 1.37
2000-01 169.06 39.27 129.80 23.2 76.8 1.28
2001-02 172.19 49.69 122.50 28.9 71.1 1.24
2002-03 182.40 43.59 138.81 23.9 76.1 1.27
2003-04* 205.10 52.49 152.61 25.6 74.4 1.31
*Quick estimates
Though nominal public investments in agriculture have increased over the years, the
gross capital formation in agriculture as a proportion of the total capital formation in
the economy has declined in both the public and private sector. The total gross capital
formation declined from 17.3 percent on an average during the 1970-80, to 11.6 percent
during 1980-90 and has further declined to an average of 9.0 percent during 1990 to
1994. Though nominal public investments in agriculture have tended to rise year after
year, in real terms, these have tended to diminish in absolute magnitude since the begin-
ning of 1980s. At 1980-81 constant prices, public investment in agriculture plunged to
Rs.12.00 billion in 1991-92 from close to Rs.18.00 billion in 1979-80. Public investment
in agriculture is the responsibility of the States, but many States have neglected in-
vestment in infrastructure for agriculture. There are many rural infrastructure projects,
which have started out but are lying incomplete for want of resources. The ideal strategy
would be to create facilitative environment, incentive structures for private investment

in these areas and in areas where it is difficult to attract complete private participation,
take up projects in public private partnership model leveraging the efficiencies of private
sector.
17 Source: Central Statistical Organisation as appaearing in Economic Survey 2004-05
(www.indiabudget.nic.in)
18
2.3 Need for enhancing Investment in Agriculture
Agriculture being a State subject, the overall public expenditure on agriculture is depen-
dent on the resources available to the States and this share has declined over a period
of years. The demand-supply paradigm, the growing land scarcity and lop-sided develop-
ment are manifestation of stagnant capital formation in agriculture. Given the importance
of agriculture in India, the repercussion of a fall in agricultural growth is bound to have
an impact on the other sectors of the economy and, in particular to the lives of around
65 percent of the population dependant on it. Hence there is an increased need for di-
recting the flow of investment towards agriculture and other related rural infrastructure
for sustaining agriculture growth
Some of the reasons for slower growth in public investment in agriculture are:
• Diversion of resources from investments to current expenditures in the form of sub-

sidies
• Large expenditure incurred on maintenance of existing projects
• Inordinate delays in completing the projects on hand
• Relatively lower allocation for irrigation, rural infrastructure and research
Presently in absence of such a market led environment private sector is constrained

in its growth. Some of the reasons for slower growth in private investment in agriculture
are:
• Poor marketing infrastructure for processing agricultural commodities, particularly

fruits and vegetables and transporting them to market centers
• Quantitative restrictions and bureaucratic difficulties in licensing. Similarly strin-

gent controls on storage and movement of several agricultural commodities.
• Cascading effect of multiple taxes at various stages from harvesting to marketing

which is more compounded by considerable variation in tax and fee structure across
the states creating arbitrage opportunities to the detriment of farmers
• Controlled prices, restrictions on purchases outside mandi
• Lack of integrated value chain concept from farm to the market
• Lack of linkages between spot and future markets
19
• Poor infrastructure
• Lack of effective credit support and credit infrastructure in rural areas
However, most of them would be taken care of automatically once there is free play of
market forces. Hence thrust must be on creating opportunities for growth with Govern-
ment acting as a facilitator encouraging increased competition, setting up of standards,
etc. One of the things that could be implemented for market forces to act efficiently is to
allow professionally managed wholesale markets by farmers cooperatives, producer com-
panies and private sector. This would encourage competition, and in turn will provide
higher value added services. An effort in this direction would attract private investment18
of Rs. 2000.00 billion in the next 5 years.
2.4 Transformation of Indian Rural Economy: Drivers of change
Over the past few years, there is a discernible transition in the Indian rural canvas, which
has come about by a host of factors. These changes will go a long way in redefining agri-
culture and would also have a significant impact on the investment credit requirements.
A few of the important changes that will impact the agriculture economy as well as drive
the demand for higher investment credit in agriculture are as follows:
• Indian agriculture is getting increasingly diversified in terms of products and pro-
cesses leading to credit requirement,19 which will be capital and credit intensive.
The stress on change warrants huge investments. An Asian Development Bank re-
view of agriculture20 from 1967-97 pointed out to three broad trends in agriculture
in Asia. These are 1. Deceleration of growth in production levels of food crops 2. Di-
versification out of food grains in favour of higher value crops and 3. Little progress
on technology adoption especially in rainfed areas.
• There is an increased trend towards commercial and horticulture crops.21 The share
of non-food crops has increased in terms of area devoted to these crops. For exam-
ple, in the year ending 1971-72, nearly 25.7 per cent of the cultivated area was
devoted to non-food grains. Their share increased to 35.1 by the 1999-2000. Food
18 Presentation by FICCI on priority Areas for Agri Policy Reforms/Investment.
19 Vyas Committee Report
20 Santikarn Kaosa-ard, Mingsarn and Benjavan Rerkasem (2000), “The Growth and Sustainability of Agricul-
ture in Asia”, ADB, OUP.

21 Vyas Committee Report
20
and cash crops i.e., sugarcane, oil seeds, spices and condiments, fruits and vegeta-
bles, etc., are acquiring greater importance. Thus the agriculture terrain is slowly
but surely moving away from Minimum Support Price (MSP) linked production to
market led-demand led production
• Similarly the share of allied sectors in agriculture, mainly dairying, fisheries and
poultry is becoming more pronounced. As an indicator of the same, we find that,
the share of livestock products in gross value of agricultural product (i.e. crop
production plus livestock raising) is progressively growing. It had increased from
being, less than 16 per cent in 1970-71 to 26 percent in 1995-96. The main engine
of growth for the allied sectors is the increase in incomes and consequent changes
in the dietary pattern. According to Ministry of Food Processing estimates, the size
of the semi-processed and ready to eat packaged food industry is over Rs. 40.00
billion and is growing at over 20 percent as a clear indicator to this change in the
dietary pattern. The demand has automatically led to infusion of private capital to
cater to the requirements of this burgeoning market. For instance22 there are over
60,000 bakeries, 20,000 traditional food units and several pasta food units. Large
biscuits & confectionery units, soya processing units and starch/glucose/sorbitol
producing units have also come up, catering to domestic and international markets.
In confectionery & cocoa based products several MNCs have set up manufacturing
units. Production of macroni/noodles is about 16500 tons, pearl barley at 1,240
tons and corn-flakes at about 600 tons. Annual Production of bread & biscuits and
other bakery products in the country is estimated at 30.0 million tones, which reveal
the changes in the dietary pattern.
• There is a clear surge of income in the rural India as is evidenced by increase23 in

per capita rural income from Rs. 5876/- in 1993-94 to Rs. 7501/- in 2000-01.
According to Omkar Goswami, head of CERG Advisory, more than a third of rural
households in India derive their income from services or manufacturing - not from
farming. As a case in point agriculture’s share in rural NDP dropped steeply from
72.4 percent in 1970-71 to 56.1 percent in 1993-94 and further to 46.1 percent in
200-01. In the successful farming states of Punjab, Kerala and Haryana over half of
all rural households have escaped agriculture altogether. Share of non-agricultural
22 Source: Web site of Ministry of Food Processing Industry, GoI
23 CERG Advisory Private Limited Report on the changing character of Rural India for ICICI Bank.
21
households in rural India has also increased from over 29 percent in 1983 to over
35 percent in 2001-02.
• Services sector is getting increasing importance in the rural areas also - from coffee
shops to cable television operators to community and social services, construction,

transport, storages services all have contributed in the non agriculture income com-
ponent. Assessing and meeting of credit needs of this sector is important. The inte-
gration between rural and urban areas has increased significantly, with the result,
mobility of labour, capital, products and even credit between the two is increasing.
• The Rural Non-Farm Sector (RNFS) has emerged as key area of focus for creating
employment in the rural sector and to enable migration from over-stretched farm
sector. At 1993-94 prices it is estimated24 that rural India contributes to around
52 percent of the country’s NDP. It must be noted that while NDP of urban India
has grown at 7.5 percent per year from 1993-94 to 2000-01, rural India has done
well to grow at 6.2 percent per annum in the same period. This is despite the fact
that agriculture has grown at less than 3 percent per annum which clearly indicate
that rural is much more than agriculture. Further per capita NDP growth in rural
India is the same as that of urban India. It is the higher population growth in urban
India that results in overall NDP growth in urban areas (7.5 percent in urban areas
compared to 6.2 percent in rural areas). The future strategy of rural institutions
would have to include strengthening the credit delivery system for increasing RNFS
employment. Development of entrepreneurs’ skills, enhanced credit flow to women
and other weaker sections, supporting tiny, cottage and village industries, and cov-
erage of wide variety of service sector activities would require larger and wider role
of rural financial institutions in RNFS sector.
• Increased share of purchased inputs indicating modernization of agriculture - The

share of the purchased inputs (for example use of hybrid seeds in comparison to
own seeds) in the input structure has increased significantly over the period indi-
cating modernization of Indian agriculture. This has also strengthened its backward
linkages.
• India with a population of 1.00 billion has the potential to become one of the largest
consumer markets after China. The country has a large segment of middle class
24 CERG Advisory Private Limited Report on the changing character of Rural India for ICICI Bank.
22
of about 350.0 million. The sheer size in terms of population and geographical
area with growing number of metropolitan and cosmopolitan cities displaying high
spending capabilities make it ripe target for food retailing. There is also the in-
teresting divide in the rural share of income versus the rural share of expenditure
suggesting that there is a large consumer boom in rural India
• Organized rural retailing25 is estimated at Rs.50.00 billion and is rapidly growing

at about 10 percent per annum. Apart from growth in demand from farm inputs,
rising rural incomes have spurred the demand for FMCG and consumer durables
with the rural sales of two sectors accounting for 59 percent and 53 percent of the
Indian markets, respectively. The growth and innovation in rural retail is being
spearheaded by different category of enterprises such as farm input and commodity
players and not the successful urban retailers. Indian retailing is shifting the format
strategy with greater emphasis on hypermarkets and specialty-supermarkets from

generic-supermarkets and departmental stores. Clothing constitutes the largest
share of rural organized market at about 30 percent followed by food and grocery (14
percent). The per capita outlets are 5.5 per thousand persons, which is the highest
in the world, but the per capita retail space is the lowest in the world with 2 square
feet per person. As much as 96 percent of the 5 million-plus outlets in India are
smaller than 500 sq. ft. in area.
• The retail boom currently witnessed in the country has not left untouched the food
sector with several retail chains such as Food Bazaar, Metro, Cafe Coffee Day, Mc-
Donalds, Pizza Hut, Dominos coming up in every nook and corner of the country.
Interestingly, small towns and even villages are blinking rapidly on the radars of big
retailers targeting volume driven growth. MNC retailers were the first to discover the
spending power of small towns. Dominos was the first fast food chain that opened
its outlets in smaller towns. The food and grocery is expected to grow at 33 percent
in next three years in the rural sector.
• There has also been a dramatic shift in lifestyles with aspirations being fuelled by
cable television, which has exposed Indian audiences, particularly the middle class,
to global lifestyles and standards of living. This, accompanied by an increase in
disposable incomes, has led to change in food habits. Urbanization is inducing
25 Source: Internal Note by New Products team of ICICI Bank.
23
change in production portfolio. Consumption basket is diversifying in favour of high

value commodities. Rural areas are rapidly emerging as high growth opportunities
for cell phones and dish televisions
• Trend towards organic food in elite domestic markets and foreign markets is being
witnessed which offers an opportunity for Indian farmers to enhance their income by
switching over to organic production. Worldwide sales of organic products reached
26.00 USD in 2001. Internationally26 the market for organic produce is expected
to grow at the rate of 10-30 percent over the medium term. Presently, total area
under organic production in India is merely 0.0015 percent of the total cultivated
area, which means that there is lot of scope in benefiting from the high organic
market growth in international markets by scaling up organic production in India.
The price premiums commanded by organic produce vary from country to country;
however, an average across countries and products shows that the price premiums
range between 30-50 percent in international markets. Major markets for organic
produce in the domestic sphere lie in metropolitan cities in India like Mumbai, Delhi,
Kolkata, Chennai, Bangalore and Hyderabad. The domestic sale of organic produce
is barely 7.5 percent of the organic production. Export sales of organic products
account for 85 percent of total production.
• The unorganized segment, in the form of cottage industries producing mostly un-
branded and often unpackaged food products, also remains important in the Indian
landscape. These cheap products are sold alongside branded/packaged offerings in
retail outlets. Key sectors include sweet and savoury snacks, and oils and fats. As
such, packaged food accounts for less than 5 percent of total food value sales in the
country. Rural India has seen rise of unorganized business in form of higher re-
tail trade, community services, manufacturing activity, transport, wholesale trade,
financial; and real estate business and construction activity. In fact the number
of rural enterprises grew from 12.6 million to 14.3 million in the post reforms pe-
riod that is from year 1990 to the year 1998. There has been a 14 percent growth
in unorganized businesses as a whole. In the same period 25 percent growth has
been seen in the rural retail trade (the number of rural retail trade enterprises has
increased from 4.1 million in 1990 to 5.1 million in 1998. In 2000-01 organized
manufacturing in rural India accounted for 36 percent of total number of units, 38
26 Report of joint study by AC Nielson ORG Marg and FiBL on organic products in India.
24
percent of total employees, 43 percent of total output and 41 percent of net value
added.
• Companies like ITC and petroleum marketers BPCL and HPCL are setting up elab-
orate shopping plazas / hypermarkets in villages to tap rural shoppers. The hyper-
markets cater to local needs and stock up items ranging from groceries to seeds and
even tractors. ITC recently had a soft launch of its first rural hypermarket, Choupal
Sagar, spread over five acres at Sehore in Madhya Pradesh. DCM Sriram in the form
of Hariyali Kisan Kendra has adopted a similar model. Spandana an NGO in Guntur
has been setting up rural hypermarkets where the products are bundled with credit.
The rural people benefit not only from higher and easier access to credit but also
avail discounts on the purchases done in the Spandana hypermarkets (Spandana
purchases products in bulk on which it earns the trade margins, part of which are
passed on to customers in form of discounts on the products).
• Information and communication technology albeit on a low scale is being used to

enhance income opportunities and access to new markets in the rural areas (eg.
ITC’s e-chaupal model). IT has also been employed in rural areas to bring in socio-
economic development, e-governance (eg. an HP i-Community in AP, Gyandoot
project in MP). Banking sector too has utilized information technology for reach-
ing out to the rural customers by setting up of IT enabled village kiosks (which
also double up as information hubs). Installation of low cost ATMs in rural locales
is another notable development while smart cards containing credit profile is also
being tried out. ICICI Bank has taken a proactive role in bringing technology to
the doorstep of the farmer by installing few low cost ATMs in various rural areas.
The automated Kisan card has been launched by the bank, which can be used for
cash drawls through the ATMs. The bank has put up such ATMs for the benefit of
the farmers in the Tobacco Board auction platforms and in the command areas of
various sugar factories.
• Emergence of Commodity markets like NCDEX would enable farmers /agri corpo-
rates to hedge their commodity exposures. This would also mean production of
crops in alignment with market forces rather than depending on MSP. These markets
would also enable a proper price discovery mechanism for agriculture commodities
and increase transparency in commodity trade. Further to facilitate the farmers to
25
reap the full benefits of open market economy there is a need for enhancing scien-
tific storage, encourage transferability of warehouse receipts, and proper collateral
management. A move in this direction has happened already by the setting up of
National Collateral Management Services Ltd. NCMSL would facilitate setting up of
accredited warehouses, and the farmers would be in a position to get easy access to
finance based on the commodity lodge with such warehouses by way of pledging the
warehouse receipt.
26
3 Future trajectory in Agriculture
Future trajectory in Agriculture: From supply led to demand led
3.1 Subsidy - Not a Panacea
The controls and subsidies in the agriculture sector have failed to reach the targeted
beneficiaries and at the same time have become heavy burden to the state economy. For
instance subsidy to fertilizer sector through Retention Pricing Scheme has led to promo-
tion of inefficiencies in the fertilizer firms. Offering irrigation subsidies has resulted in
excessive use of agricultural water and led to high scale wastage. Populist schemes such
as free power and subsidized power have resulted in passing of electricity losses as agri-
cultural usage. According to the report of M.S. Swaminathan Committee on agriculture
and allied sectors,27 subsidies like free electricity for groundwater use and canal irriga-
tion have inflicted serious damage on natural resources apart from adversely affecting
the finances of the states.
It is estimated that subsidies for fertilizer, irrigation, and power alone account for over
2 percent of gross domestic product (GDP), and nearly 9 percent of agricultural GDP. Total
agricultural subsidies are much more which leads to higher fiscal deficits. Rather than
promoting balanced and equitable development subsidies have lead to regional disparities
with agriculturally dominant states benefiting at the expense of the agriculturally weaker
states.
Minimum Support Price is another distortion that has led to over production of food
grains despite burgeoning food grains stocks with FCI. It has also stifled diversification
to other remunerative and market demanded crops with the result that we have even
resorted to exports at a lower price. There is need to review our food management pol-
icy given our high levels of buffer stocks which have grown unwieldy in the recent years
leading to high transport and logistics costs. Right strategy could be to restrict the open
procurement of food grains to the minimum required for food security purposes. Disman-
tling of the unlimited procurement or a balanced reduction would in itself lead to crop
diversification besides huge savings for the public exchequer. The savings in turn could
be utilized for creating targeted and better-managed safety net for the poor or for creation
of infrastructure facilities such as provision of all weather roads, link roads from villages
27 Source: The M S Swaminathan Committee on agriculture and allied sectors for the Tenth Plan
(infochangeindia.org/archives1.jsp?secno=10&monthname=March&year=2002&detail=T)
27
to markets, rural electrification etc.
3.2 Reforming Agriculture
There is need to shift from supply led production of the yore to the market led production.
IT must be effectively deployed to procure latest market information and the production
should be linked to what is demanded in the market. Products in which India has a
competitive advantage should be treated as extreme focus areas for generating surpluses
for exports.
Private investment needs to be encouraged in specific areas of agriculture to reduce
the burden on public investment. Focus on agricultural exports, reduced dependence
on rainfall and private sector involvement are some of the measures that can ensure an
annual 5 per cent growth in the agriculture sector along with an increase in productivity
as per international standards. Developing agricultural processing and vertical coordina-
tion in the supply chain could play a role in promoting capital investment and technology
transfer in rural India. Contract arrangements with processors can help farmers obtain
loans, modern inputs, and technical assistance.
The government needs to concentrate on rectifying the inefficiencies, which may in-
duce more private investments. For instance restrictions on the movement and stocking
of grain keep private investments in storage and processing sector low. Various laws and
regulations, which continue to stifle the growth of agriculture sector, need to be reviewed
and amended or done away with. Agriculture and allied products, which are covered
under the small-scale industry reservation list, should be gradually de reserved.
To raise investments in, say, canal irrigation or electrification, subsidies on these crit-
ical inputs need to be cut down. Efforts must be directed towards increasing / putting in
place user charges on electricity and irrigation. This requires major reforms in the pricing
and institutional framework for the management of these inputs. Money saved should
be diverted to create productive infrastructure - irrigation facilities and watersheds in
dry land areas. The MS Swaminathan committee on agriculture has recommended that
subsidies should be diverted to activities, which directly benefit technology transfer, de-
velopment of farm resources and the generation of employment and income for the rural
poor.
Thus food and agricultural policy must shift from poorly targeted subsidies to a fo-
cus on investment with an emphasis on human resources, public goods, and meeting
28
the needs of poor people and regions. Key investment targets include less favoured ar-
eas (hitherto neglected regions) with high potential, agricultural research, infrastructure
(especially roads and storage), and education. Investments in irrigation and water con-
servation should get the highest priority in any policy agenda for the agriculture sector.
Special attention needs to be given for building roads, markets, other transportation fa-
cilities and cold storage and handling facilities at the railheads, sea and airports along
with increased investment in cold storage facilities. Agricultural research must make
use of all relevant tools, including molecular biology, conventional approaches, and bet-
ter utilization of farmer’ s own knowledge, to help meet the needs of poor farmers and
regions.
Alongside these public investments, agriculture should become more market oriented,
with better-targeted safety nets to assure that the transition from controls and subsidies
does not leave poor people worse off. Safety net programs and agricultural and rural
development programs alike need to be designed and implemented with the participation
of the intended beneficiaries, rather than in a top-down bureaucratic manner.
Agricultural policy also needs to shift from the heavy emphasis of the past on food
grains to more diversified and higher value added activities. Much greater attention must
also be paid to sustainable use of natural resources. Globalization can be shaped to

benefit poor people. The needed shifts in domestic food and agricultural policy would
go a long way to assuring that smallholders and other rural poor people have a stake in
opportunities brought about by modernization and globalization by assuring them access
to infrastructure, inputs, credit, markets, and organizations such as cooperatives that
can facilitate their participation in markets and enhance their political voice.
By one estimate, after accounting for poor targeting and leakage into the open market,
less than one quarter of the grain distributed through the public distribution system
(PDS) actually reaches the poor. An effective28 mechanism to help reduce this drain
on public resources could be by way of creation of a chain of accredited warehouses in
rural areas, which would facilitate private stockholding in rural areas, and thus help the
government reduce its buffer-stocking role with basic food commodities.
An effective system coupled with availability of credit for holding crop inventories in
accredited warehouses would lead to improvement in rural liquidity, lower the borrowing
cost, reduce storage losses, lead to shorter supply chains, incentivise grading and quality,
28 Report of Jonathan Coulter, Natural Resources Institute, UK and G. Ramachandran, India to the Forward
Markets Commission, Government of India and The World Bank (October 2000)
29
offer better price risk management to farmers and generally enhance the competitiveness
of domestic producers and processors.
Similarly there is need to develop the Commodities futures market in the form of
Government-Industry joint initiative. Foreign institutional Investors (FII) are currently
not allowed nor disallowed under any law. FIIs have added immense value to the equity
markets, and given opportunity could play a similar role in the commodities market. Their
involvement could give a big push to commodities market in India, hence they should be
allowed to operate in commodities market Similar restrictions on Mutual Funds from
not using derivatives apart from hedging need to be lifted. However, this would require
necessary approvals from SEBI.
Similarly, banks must be allowed to operate on behalf of farmers and participate in
commodity derivatives. This would also boost the morale of the investors. RBI could
set up limits for the banks for their operations in the commodities market. This would
necessitate amendment in the Banking Regulation Act and could be affected on a priority
basis, as it would be beneficial for all the stakeholders - market, banks, and the farmers.
3.3 Risk Mitigation through Insurance
With the advent of liberalization and the entry of lot of private sector insurance compa-
nies, there is a renewed focus on launching products that mitigate various forms of risks
in rural area. This would not only enable penetration of various insurance products to
the rural areas but also would enable innovations to customize products suited to ru-
ral needs. Rural population29 faces multiple risks, which can be broadly divided into
livelihood risk and household risks.
Livelihood risks occur across the whole range of rural production activities and they
impact the rural population by increasing volatility of the output. These can be broadly
classified as follows:
1. Weather: It has a high degree of impact on agriculture and moreover has multiplier
effect on the economy
2. Asset loss: It has an impact on local micro enterprises and can have devastating
consequences for people dependant upon it
29 Source : Internal Paper of ICICI Lombard by Paveen Vecha
30
3. Wage days: Are lost mostly due to adverse weather conditions and consequent lower
requirement of labour for agricultural operations and
4. Death of animals: It is either weather induced or caused by some other factors like
disease and impacts the lives of poor people whose sole source of income is animal
husbandry.
Household risks are basically different from livelihood risks in the sense that while
the former makes the output uncertain the latter brings upon unforeseen expenses upon
the households and sometimes even loss of breadwinner of the house. Household risk
could be classified in the category of Health disorder, death and accidents which have
grave consequences for the households in terms of increased expenditure on healthcare;
death of earning member of the household; and increased expenditure and loss of earning
member of the household due to permanent disability. Further, whenever personal assets
such as house are lost due to catastrophes it brings about extreme financial hardships
on the households.
In view of the above two forms of risks, financial institutions lending to rural popula-
tion have been weary about the losses. But stronger risk management products coupled
with credit can actually reduce the risk in credit and help to build the confidence of the
lending agencies.
As is noted from above, the biggest livelihood risk that rural people face is related to
weather, as agriculture is the principal means of livelihood for rural population. A truly
transparent and effective index based weather insurance product30 suited to require-
ments of farmers has already been developed by ICICI Lombard and is being replicated
by other insurance companies too. In Index based insurance products,31 payouts are
based on a verifiable index, and entail risk coverage to farmers doing away the negative of
high overheads of loss adjustment and supervision typical of traditional crop insurance
products. Another advantage is in terms of the transparency in computation of payouts
because of which claim settlement can be immediate. For instance farmer could be com-
pensated for lack of rainfall the very next day such that he can utilize the insurance
30 Weather insurance has multiplier effect on the economy as it enables access to factors of production. Ad-
equate protection offered through the weather insurance product enhances the risk taking capacity of the
farmers, banks, micro-finance lenders and agro-based industries. This in turn would result in boosting the
entire rural economy. Further, as the product is developed on the foundation of universally acceptable param-
eters, it is easier to transfer the risk to international financial markets through reinsurance. This allows for
global pooling of risk and thereby more competitive “portfolio adjusted” pricing for the insurer and ultimately
for the farmers.(source : Internal Paper by Prveen Vecha from ICICI Lombard)
31 Also refer ‘A Blueprint for the Delivery of Comprehensive Financial Services to the Poor in India’ by Bindu et
al (2005)
31
proceeds to make alternative irrigation arrangement and mitigate his crop damage to the
maximum extent possible.
However, the limiting factor to scale up would be the availability of automated rain
gauges across the country. Investment by government in setting up of weather stations
across the country would enable the farmers to protect themselves from the vagaries of
nature. This would also enhance the flow of credit to agriculture as the basic crop risk
is mitigated to a large extent. NCDEX through National Collateral Management Services
limited (NCMSL) is also contemplating to set up such rain gauges in few parts of the coun-
try. Weather futures (temperature-related weather derivatives), have immense potential
and hold special significance in the Indian agriculture context dependant on the vagaries
of monsoon. They could even be seen as alternative to crop insurance and even MSP by
way of option trading by farmers wherein government could think in terms of paying the
options premium. According to UNCTAD’s global expert on commodity futures Lamon
Rutten, weather futures are a good example of product innovation. “Weather futures are
important and cheaper than crop insurance which is important to make the agriculture
-sector cost-effective under the WTO regime”. Weather futures were first traded on the
Chicago Mercantile Exchange (CME) in the year 1999 and since then they have picked
up significant volumes. It has also started trading in the Euronext-London International

Financial Futures Exchange (LIFFE). NCDEX intends to launch this facility in the country
soon.
Another fundamental concern for the rural populace relates to human health. Acci-
dent or critical illness of a productive member usually spells acute financial penury for
rural households. Thus while it is crucial to cover the most important rural livelihood
agriculture it is equally important to provide coverage to people on whom the households
depend. Certain companies like ICICI Lombard have developed Personal accident and
Package Health Insurance policy for rural population. Similarly insurance companies
like ICICI Lombard are tying up with chain of hospitals to open up diagnostic centers in
different parts of the country including in rural areas to ensure cashless medical treat-
ment for rural population at low premiums.
It would be pertinent to mention that the country has been witnessing poor productiv-
ity levels both on the crop and the cattle front due to lack of good extension services. The
extension services of the Government departments have either been ineffective or non
operational. This continues to be critical area of challenge for us. Emergence of contract
32
farming, private service provides like MSSL, Rallis, Parry acting on behalf of the buy-
ers have addressed this problem in a limited scale but situation continues to be grim in
most parts of the country. Hence such efforts would require scaling up in an accelerated
manner.
33
4 Recent Innovations in Rural Arena
In the past few years rural sector witnessed quite a few innovative approaches that were
instrumental in bringing about rural transformation albeit in a localized manner. How-
ever, a number of such efforts hold potential to be replicated on a larger scale. Some of
these approaches are not directly related to investment credit but have been discussed in
view of the positive change that they have brought about in the rural sphere.
4.1 Collective Action in the Management of Irrigation Systems
Collective Action in the Management of Irrigation Systems. e.g., Andhra Pradesh

and Maharashtra
In AP participatory irrigation management was effected through a new legislation The
Andhra Pradesh Farmers Management of Irrigation Systems (APFMIS) Act of 1997. A
paradigm shift in irrigation management was brought about by transferring responsi-
bility for the operation and maintenance (O&M) of irrigation schemes to the Water User
Associations (WUAs). The reform metamorphosed the role of irrigation agency from ser-
vice provider to facilitator and has led to increased revenues, an increase in irrigated
area, and enhanced involvement of farmers in the operation of irrigation. Reform has
also made the irrigation agency accountable to the farmer organizations, and resulted in
the tripling of water charges and linking the money collected to the costs of operating and
maintaining irrigation systems.

Similarly, Maharashtra too has formulated a clearly defined and codified policy, called
participatory management, of promoting transfer of irrigation management responsibil-
ities from the government to farmers. In addition, Maharashtra encourages NGOs and
Irrigation Department officers to help farmers create WUAs. The state offers incentives for
farmers, including relaxation of legal crop restrictions and restrictions on conjunctive use
of surface and ground water, channel repairs, rebates for prompt payment of irrigation
fees, volumetric fees lower than crop-area fees, and maintenance grants. The Irrigation
Department monitors the progress of transfer throughout the state.
Transfer of rights and control over water related resources with the implied expectation
that they have to live with the consequences of their management appears to be the
key to making users effectively manage their resources. Users maintain the physical
structure better when substantial responsibilities are transferred to them. The equity in
34
water distribution also improves when WUAs distribute water. The management of local
resources by the local community instills in them sense of responsibility and ownership
which in turn makes it easier to levy and collect levy charges as long as the process/
method of calculation of fee/charges is transparent and quality service is provided to the
beneficiary. However, political interference for reduction of charges / frequent changes
in charges and in distribution of water needs to be checked for wider replication of this
model in the country.
On the macro irrigation front, Andhra Pradesh has taken lead in starting a series of
new large size irrigation projects. The strong commitment of AP Govt. to change the
irrigation status of the state can be gauged by the increasing support to irrigation in the
state budget, which has almost doubled to Rs.65.00 billion as against Rs.33.00 billion in
the previous year. Leveraging on the higher budget the government plans to undertake
irrigation projects involving investment to the tune of Rs.220.00 billion over a period of
next 5 years. BOT contracts with government guarantee for debt servicing, annuity using
the budgetary allocation for debt servicing are some of the models proposed to be used.
The project delivery is being done by the hand of experienced and capable private parties
who are allotted projects after a process of tendering. Pre qualification and categorization
of select organizations on the basis of defined technical and financial parameters has
ensured speedy award of tenders.
In a series of first of its kind by any state in the irrigation sector, AP government has
floated tender for a 6-7.00 billion-irrigation project to be offered on BOT basis for 15 years
using Annuity model of payment on the lines of NHAI roads model. Maharashtra too has
come out with the policy of offering incomplete capital-intensive projects on a long term
BOT basis to the private sector offering the land and project assets in the present asset
to the interested private parties. The above illustration drives home the point that private
participation can be elicited in the bigger projects as well but would require either bud-
getary provisions so as to make fixed payments to private entities or innovative funding
mechanisms such as annuity, unlocking value in the under performing public assets by
way of transfer to private entities in lieu of private investments. Another approach could
be bundling of irrigation project with perhaps some real estate development in the near
vicinity.
Another strategy for funding of large infrastructure projects could be by use of First
35
Loss Default Guarantee Funds (FLDGs)32 by the Government as suggested by Mor and
Sehrawat iciciresearch.org paper. This requires government to create enabling condition
for private sector participation by eliminating/mitigating the uncertainties and provide
risk capital for the uncertainties that cannot be done away with. According to the pa-
per, FLDGs33 seek to provide non-event specific partial credit guarantees to lenders, are
limited to only a part of the loan (say 25.0%) and operates on a first loss basis (i.e., in
case of 25.0% FLDG the first 25.0% of the loss would be absorbed by the Fund). This
manner of providing capital is in many ways superior to recapitalising existing intermedi-
aries or creating new ones with Government capital. FLDG concept draws its value from
the diversification benefits inherent in a larger number of projects. FLDG pool makes
this diversification benefit available to the lenders by reducing the project risk borne by
them. In the US markets, monoline insurance companies like the MBIA34 provide such
credit supports for urban local bodies and other borrowers. Such innovations, can lead
to accelerated development of rural infrastructure through private participation and also
attract higher credit flow.
4.2 Franchisees for rural power collections
Franchisees for rural power collections. e.g., GVPs in Karnataka

For the power distribution companies servicing rural consumers has always been a
daunting task in terms of costs involved such as lower collections despite subsided sup-
ply, higher transaction costs etc. This has lead to apathy towards rural consumers by the
DISCOMS (power distribution companies)/power utilities working in the rural areas and
consequently there are more instances of power breakdowns, low voltages and endemic
transformer breakdowns in the rural areas. In the above scenario, a pioneering concept
for Rural Power distribution was initiated under the aegis of Xavier Institute of Manage-
ment Bhubhneshwar (XIMB)’s consultancy wing, which is christened as the Franchisee
model for Rural Power Distribution. The implementation of the model has led to gains
32 Source: iciciresearch.org paper,’ Sources of Infrastructure Finance’ by Nachiket Mor and Sanjeev Sehravat
33 ICICI Bank has effectively used FLDG as a credit enhancement mechanism for its micro finance initiatives,
creating a significant positive impact on the financing structures for micro finance portfolios of some of the
leading MFIs in the country. ICICI Bank’s model is based on securitization of their portfolios with an FLDG from
the MFI. Similarly, ICICI Bank’s joint venture with Grameen Foundation, USA also plans to utilize FLDG cover
as a by form of credit enhancement for the market issuance. FLDG to be provided by the joint venture would
not only improve the rating of the micro finance paper, but also instill investor confidence in the sector,which
has till recently been deprived of funding from the mainstream financial institutions.
34 MBIA is a US based financial guarantee insurance company and is rated AAA by S&P. It has been providing
triple A credit enhancement for municipal and structured debt obligations since 1974. It has enviable record
of very low defaults even though it has guaranteed more than 35000 municipal and asset backed transactions
with total value exceeding $ 1.5 trillion.
36
not only for the DISCOMS but also for the rural consumers. Similar initiatives are being
tried in other parts of the country like Noida, Orissa.
In Karnataka Corp HRI Resources (the professors from XIMB have left XIMB to start
this new venture) is actively working with Gulburga Electricity Supply Company (GESCOM)
and Hubli Electricity Supply Company (HESCOM) and is involved in the implementa-
tion of the franchisee rural power distribution project. The Franchises in Karnataka are
called Gram Vidyut Pratinidhis(GVP). In all there are around 4500 Franchisees spread
over 15,000 villages in Karnataka that are working with XIMB and the power utilities.
The GVP are usually persons in the age group of 18-35 years, are financially sound,
comparatively well educated with minimum qualification being matriculate and have a
backing of maximum number of villagers as they are selected based on the opinion from
Gram Panchayat. Under the present arrangement GVPs/Franchisees are involved in the
meter reading, bill distribution, bill collection, customer complaint redressal. There is
a MoU that is entered between the Franchise and the DISCOM, which lists the roles
and responsibilities of the Franchisees and the payment mechanism, by DISCOMs to the
franchisees. The collections are done by the Franchisees on behalf of the DISCOM/power
utility and the collections are deposited with the local offices of DISCOM on a daily basis.
Franchisees are required to give performance bank guarantee to the DISCOM. Banks like
ICICI Bank have been active in providing bank guarantee facility to the Rural Franchisees
in Karnataka.
The success of this model in Karnataka leading to higher metering in rural areas,
increased efficiency in collections, lower instances of theft, higher customer satisfaction
has again demonstrated that rural consumers are willing to pay in return of provision
of reliable and quality service to them. Another high point of this model is in terms
of savings to the distribution companies who only need to pay fixed and pre defined
charges (variable payment on a pre agreed criterion linked to performance), have the
flexibility to effect changes in view of non/under performance. There are also savings
in terms of employee cost for DISCOMs, who could be deployed in some other locations
or can concentrate on the operations and maintenance activity. Similar models could be
launched in other locations in the country; rather in a phased and gradual manner private
entities/ bigger franchisees/ cooperatives/farmer federations could be awarded O& M

work in rural areas and even setting up of rural distribution infrastructure. This can lead
to savings to DISCOMs or lower losses from distribution in rural areas in comparison to
37
setting up their own paraphernalia till the last mile and increase efficiency and customer
satisfaction at the same time. This would increase the bankability of the DISCOMs itself
as well as create new opportunities for banks to fund capable private entities entering into
a time bound transparent agreement with DISCOMs for undertaking rural distribution
infrastructure development, maintenance, collection works.
4.3 Localized/Distributed generation of power. e.g., Desi power
Decentralized Energy Systems India (DESI) Power, has launched an innovative program
called EmPower Partnership Programme35 (EmPP). EmPower Partnership Programme,
links employment and power for the sustainable development of the village and rural
areas. DESI Power’s business model involves building small scale (50 KW to 500 KW)
biomass gasification based power plants in remote villages with direct association of local
partners (NGO/ Panchayat /co-operative) who own and operate the plant while technical
help is provided by DESI Power which also takes up small equity in the project.
The village level biomass projects by Desi Power are of small scale and typical examples
of distributed generation, transmission and distribution, which is being mooted for last
mile village power connectivity. The projects set up by DESI power are need based where
demand of power has emanated from the locals themselves (in view of either lack of grid
connectivity or reliable/negligible grid supply) and particularly the local entrepreneurs/
farmers having own micro enterprises/using irrigation pump sets who can afford to pay
reasonable cost for supply of reliable/quality power. Currently these local industries
entrepreneurs (shop owners etc) and users of irrigation pump sets are using diesel based
gensets- the supply from that is costing them Rs. 8-10/kwh (in addition to the capital
investment) as against supply of power at Rs. 4.5-5.00/kwh from the pure gas based
biomass projects of Desi Power.

The replacement of fossil fuels power generation by small scale biomass gasification
systems in these kind of projects also results in savings in Co2 emissions (unto 550
tons/year per 100 KW) leading to ecological gains besides creation of additional village
level employment opportunities. The farmers are likely to benefit on account of assured
buy back for biomass produced by them as also assured lower cost irrigation through
pump sets powered by the biomass plant. Besides the same, supply of power in the
villages is likely to trigger socio economic development in the near vicinity (for example in
35 Source: www.Desipower.com
38
a biomass based project at Baharbari in Araria by Desi power a small village level market
came up within months of setting up of power plant which is drawing power from the
biomass power project).
Models like Desi Power have the potential for ushering last mile connectivity in the vil-
lages as also lead to overall improvement in the village economy. The aspect of utilization
of local resources for meeting own needs gels with the Gandhian concept of creating self-
reliant village economy for equitable growth of the nation. Banks like ICICI Bank have
opened up dialogue with companies like Tata BP Solar,Shell Solar for making availble
cheaper solar PV(photo voltaic) systems to rural clientele.
4.4 IT and Supply Chain Management in Agriculture
Information technology in the recent past has been utilized for capturing market signals
and for creating effective backward and forward linkages. One of the most successful
IT enabled intervention in the rural arena has been the ITC’s e-chaupal model. The
model is a high-tech version of the traditional “choupal”, or “village gathering place” in
Hindi, where farmers are provided with the latest weather reports, local and international
produce prices, and farming best practices. They also serve as procurement and purchase
points, allowing farmers not only to sell their produce to ITC, but also to buy agricultural
inputs and consumer goods for daily household use. IBD has a large network of soya
e-chaupals in Madhya Pradesh wherein the model is being used to procure soybean from
the farmers. Apart from the higher prices fetched by farmers due to direct selling via
e-chaupals, e-chaupals also facilitates purchase of inputs at lower costs and technical
help to the farmers. The e-chaupals are connected through VSATs and are managed by
the farmers, selected from within the community and trained, known as ‘Sanchalaks’.The
investment in each kiosk is around Rs. 0.25 million. ITC currently has 4700 installations
covering 28,000 villages in 6 states.
Another application of IT is in terms of providing timely information to farmers. A case
in point is Information Village Research Project implemented by the M.S. Swaminathan
Research Foundation, for Pondicherry fishermen. As part of the project, computers were
placed in the village center and connected to the internet, through which regular weather
reports of the Indian astronomical office could be accessed. The weather report is broad-
cast by loudspeakers and through VHF radios which enabled fishermen to determine low
and high tide before sailing off to the sea to fish. In the backdrop of Tsunami tragedy that
39
struck our country in the recent past and devastated lives of millions of farmer fishermen
in the coastline, applications like these assume much more relevance.
A village level internet kiosk can be an effective channel to deliver a suite of financial
services to the unorganised sector right at their doorsteps. A diverse range of products
such as Life & General Insurance (weather, health, livestock, personal accident etc), In-
vestment Services (Stocks, Bonds, Mutual Funds), gold purchase, credit products includ-
ing micro-loans, agricultural loans, consumption loans and transaction & bill payment
services and derivatives for small farmers (coffee options) could be offered to rural popu-
lation through these kiosks at a lower cost.
4.5 Leveraging Mandi Cess for Funding of Roads in Madhya Pradesh
Madhya Pradesh (MP) has made significant strides in the roads development under the
PMGSY scheme. In addition to its share of PMGSY, which hovers around 9 percent of
total PMGSY fund, MP is leveraging its mandi cess receivables from the State Mandi
Board for borrowing from the banks and using the money raised for accelerated rural
roads development. The state government has started levying a 1 per cent extra cess on
food grains and other agricultural products traded in mandis of which 0.85 per cent is
being spent on roads. In this manner, the MP Government has been able to generate
Rs.1.00 billion additional funds every year. This additional source of revenue is being
leveraged to borrow funds from banks for undertaking high cost projects and undertake
road development in a systematic and planned fashion rather than in an ad-hoc manner.
Rather for the implementation36 of PMGSY, it has put in place a dedicated Madhya
Pradesh Rural Roads Development Agency (MPRRDA) with clear vision and objectives.
The best feature has been that the new Authority was formed with no additional costs
to the state as all the employees were taken form deputation from government depart-
ments. For operational efficiency an Empowered Committee has been appointed under
the chairmanship of Chief Secretary, which will avoid delay in decision-making.
The MP example has proved that how simple innovations can effect big changes and
can be easily replaced in the other states. Similarly leveraging on the mandi cess re-
ceivables could be employed as a strategy for construction of rural roads and also for
modernization and up gradation of state mandis.37 An effort in this direction has also
36 Source : India Infrastructure Report 2004
37 Sincethe rural roads are most likely to benefit agriculture in the first instance and perhaps lead to increase
in the amount of cess that mandis receive this may also be viewed as a long-term investment by the Mandi in
40
been done by Punjab through Punjab Rural Development Board. The challenge in most
of these projects with large positive externalities is that it is difficult to find a way to get
an entrepreneur to promote and a bank to fund the project unless a way is found to
identify revenue generating components and designing comfort levels and risk mitigation
strategies for facilitating Bank finance. A parallel could be drawn from the Bangalore-
Mysore highway project wherein the private project promoter in addition to construction
of road network was given the rights to develop real estate component in the real vicin-
ity. This created incentive for the promoter to commit its funds to the project and also
secure funding from banks on the basis of increase in the market value of area because
of construction of road. Similar models could be attempted in rural domain. In fact one
such idea of constructing rural roads is being contemplated by an MFI Vivekananda Sewa
Mandir Sishu Udyan (VSSU), based in 24 South Parganas, West Bengal. The village road
with an estimated cost of Rs.7.5 million would be built through a special Infrastructure
Special Purpose Vehicle formed which could involve multiple partners like VSSU, land
owners around the road who will gain from the price rise. The model on similar lines
with Bangalore-Mysore highway project intends to develop commercial properties in the
vicinity of road and also charge for access to the road, which would be connecting village
to the market. Such innovations especially in the rural context can go a long way in
bridging the urban rural divide and enhance the economic status of rural population.
4.6 Unlocking Values through Integration. e.g., Poultry
The structure of Indian poultry industry varies from region to region. While independent
and relatively small-scale producers still account for most production, relatively large-
scale integrated producers account for a growing share of output. Integrated operations
include large regional firms that incorporate all aspects of production, including raising
grandparent and parent flocks, rearing day-old-chicks (DOC), contracting production,
compounding feed, providing veterinary services, and wholesaling and retailing. Poul-
try integrators have been expanding most rapidly in southern India, particularly in the
Coimbatore area of Tamil Nadu, where integrators now account for about 75 percent of
production and consumption.
Suguna Poultry Farms Limited is today the largest integrator in India based out of
coimbatore. Suguna as an integrator provided independent growers guaranteed returns
its own interest.
41
of contract farming, which was preferable to the vagaries of market returns. Integration
by Suguna has brought two important changes to the poultry industry in southern India:
lower average costs of production through improved technology and management prac-
tices and a collapsing of the margins previously commanded for the various production
inputs; and smaller producer-retail margins and lower retail prices for poultry meat. This
lead to a large increase in demand in the southern region which currently consumes 3.3
Kg of chicken per capita against national average of 1.3 Kg per person.
Another successful example of vertical integration in the poultry sector is that of Aram-
bagh Hatcheries Limited. There are strong and regular business cycles in operation in
the poultry industry. Typically, middlemen take advantage of these business cycles by
offering unremunerative prices to the farmers during the slack demand and extract high
period of credit from the producers of day old broiler chicks and feed. AHL realized that
to ensure continuing viability, profitability and growth and to successfully combat both
seasonal fluctuations and cyclical changes it is necessary to come closer to the consumer
and to be vertically integrated in its operations. The company started developing this mar-
ket through its own chain of retail shops in and around Kolkata for the sale of dressed
broiler chicken meat and other value added items under its own brands. This has helped
company in establishing price leadership and having influence over wholesale-retail mar-
gins. Intervention at the right point in the value chain is the high point of the above two
examples in the poultry sector.
4.7 Uttaranchal - Participatory Horticulture Development
A participatory approach in horticulture,38 which could be considered as the first attempt

in the country to involve primary stakeholders in the sector, has been attempted in the
Government of India sponsored Integrated Development of Horticulture Project (IDHP)

in Almora/Bageshwar districts of Uttaranchal. Initiated in 2001, the IDHP has been
successful in the formation of 133 Farmer’s Interest Groups (FIGs) (in 61 villages) and
in streamlining these groups for direct and participatory involvement in planning as well
as implementation of the project. Further, these FIGs are integrated to form the regional
Farmers Federation (FF).
The project gives a unique example of symbiotic relationship between NGO and Gov-
ernment functioning. The project planning, implementation is the prime responsibility of
38 Source: Horticulture Technology Mission Report submitted by UdeC to Government of Uttaranchal
42
NGO concerned, however, the Horticulture Department is involved for ensuring technical
inputs. Representatives of FIGs/ FF are involved directly in the purchase of inputs. FF
in close consultation with FIGs and regional offices provide the rationale and demand
under various components of IHDP projects (such as number of plant nurseries required,
quantity of inputs required etc) while preparing project proposals. Selection of beneficia-
ries under the project is done at village/ hamlet level by FIGs and then approved by FF in
monthly meetings. FF finalises the demand and allocates the project inputs to different
FIGs on rational basis. FF and FIGs assist in the distribution of inputs and cash sub-
sidy to farmers and have a significant role in monitoring. Strengthening federations and
groups has been an integral part of the clear exit policy perceived by the project. This
is so because after winding-up of the project such institutions could continue to provide
the interventions for horticulture development. Participatory approach has been the main
reason for the success of the project and clearly acts, as a pointer towards the direction in
which the government sponsored programs must move for effecting grass root changes.
4.8 Supply Chain Solution for Horticulture Produce
Lack of chain integration39 and absence of proper cold chain infrastructure leads to ex-
cessive wastage and destruction of value horticulture produce. This in turn has impeded
mass scale growth of horticulture. ICICI Bank is credited with facilitating supply chain
integration for horticultural crops such as Apples that has not only lead to higher real-
ization for farmers but also resulted in giving better quality of horticulture produce to the
ultimate consumer. Bringing private sector investments across the value chain facilitated
the change. ICICI Bank not only provided finance to these investors but also provided
guidance in the establishment of the value chain including developing linkages with the
growers and the markets. The success of Devbhoomi Apples from Himachal Pradesh bear
testimony to the fruits of supply chain integration in the horticulture sector.
4.9 NDDB’s Terminal Market
In the series of first of its kind, Mother Dairy Foods Processing, a wholly owned subsidiary
of Mother Dairy Fruit and Vegetable Ltd. (NDDB) has established auction markets for
horticulture produce in Bangalore. The running as well as operations and maintenance
39 Source: internal note by ICICI Bank on Building a Sustainable Rural Business Model.
43
of the market is done by NDDB. The project,40 with an outlay of Rs 1.50 billion, covers 200
horticultural farmers associations with 50,000 grower members for wholesale marketing.
Their produce is planned with production and supply assurance, providing both growers
and buyers a common platform to negotiate better rates. Before setting up of auction
market by NDDB all agricultural commodity operations, were under the purview of state
government and the market was ridden with corrupt practices and lack of transparency.
There were also no facilities for the pre and post harvest technologies.
Terminal market like the ones created by NDDB could result into increase in produc-
tivity, rise in quality standards, reduction in losses and ensuring access to an increasing
supply of fresh produce at reasonable prices to the consumers. These terminal markets
could operate as a parallel market to the current system of mandis and offer a fair alter-
native to traditional mandis characterized by middlemen. It is time we allowed opening
up of agriculture market by private players in India with adequate provisions put in. Es-
tablishment of private market would result into offering value added services like storage
besides provide incentives to farmers for quality control, offer greater transparency, and
reduction in losses through handling and transportation by setting up collection centers
at the farm level apart from fetching higher prices for the produce by farmers.
4.10 Apni Mandis in Punjab
The Punjab Mandi Board undertook experiment of ‘farmer’s market’ with a view to give
small farmers around cities direct access to the consumers by eliminating the middlemen.
It is now known as “Apni Mandi” for it belongs to both farmers and consumers, who
can mutually help each other. A sum of Rs. 0.52 million is being spent for providing
plastic crates to 1000 farmers. Each farmer gets 5 crates on subsidized rate. At the
venue of the mandi, the Board is providing basic infrastructural facilities. At the farm
level, extension services of the relevant departments are pooled in, securing the benefit
of on-going Government scheme to Apni Mandi farmers. These benefits include inputs
subsidies, better quality seeds and loans at reasonable rates of interest from the Bank.
Apni Mandi scheme provides self-employment to the producers and also remove the social
inhibitions among them for retail sale of their produce. With the success of Apni Mandi
scheme in Punjab, other state too could work on similar lines.
40 Source Article A fruitful venture by Joydeep Ray on www.rediff.com
44
4.11 HLL’s Shakti project
HLL’s Project Shakti41 (“strength”) connects self-help groups with business opportunities.
Hindustan Lever offers the groups the chance to become local, small-scale sellers of the
company’s products. The groups, typically of 15 to 20 people, buy a small stock of items
such as soap, detergent or shampoo, which are then sold directly to consumers in their
homes.
Working in conjunction with the local district authorities, Project Shakti was piloted in
2002 in 50 villages in the state of Andhra Pradesh, and has since been extended to other
states, creating more than 9,000 entrepreneurs over 22,000 villages. Hindustan Lever
provides free training on the basics of business management to the groups, whether
they choose to become Hindustan Lever distributors or to set up other types of small
enterprise. The company also offers continuing “on the job” training once the business is
running.
Many of the women have little or no education and no experience of running a busi-
ness, so such support is an essential component in enabling the business to succeed.

Most of the women who have chosen to become rural sellers of Hindustan Lever prod-
ucts have managed to create a sustainable micro-enterprise for themselves. It has not
only lead to a steady monthly income for them but almost a doubling of their household
incomes. This helps to improve family health, hygiene and living standards, including
education for their children. Project Shakti also works in partnership with NGOs and
local schoolteachers to provide educational resources for children through libraries and
computer kiosks.
4.12 Specialized institutions. e.g., PAIC
As a major initiative for marketing of fruit and vegetables being grown in the State of
Punjab, a separate Corporation namely Punjab Agri. Export Corporation was formed with
Punjab Mandi Board and Punjab Agro Industries Corporation contributing 50 percent
equity each for establishment of this Corporation. Punjab Agro-Industries Corporation
today has a strong extension service network and excellent rapport with the farmers.
The corporation has an equity capital base of Rs.466.6 million and employs about 1000
people at different levels in its regional, district and corporate offices. It is the nodal
agency of the state government for promotion of agro-based industries in Punjab. PAIC
41 Source: Baramati Initiatives-Using ICT for Social Development
45
is involved in the provision of inputs, introduction of new technology for horticulture

and also acts as the institutional promoter for select horticulture projects. The success
of PAIC can be gauged from the fact that it has won the National Productivity Council
Award in recognition of its promotional work, for the last seven consecutive years. It has
been instrumental in launching 21 successful projects costing about Rs.3,500.0 million
in the state of Punjab.
4.13 Contract Farming and Credit Bundling
In India, banks have been ready partners in contract farming42 schemes set up by agricul-
tural equipment or input suppliers to enhance credit. For example, Rabo India Finance
Private Ltd. is establishing agriculture service centers in rural areas in cooperation with a
number of agro-input and farm services companies. The services provided are much like
those in contract farming, but with additional flexibility and a wider range of products
such as inventory finance. In addition to storing products, each center rents out farm
machinery, provide retail agricultural inputs and information to farmers, arrange credit,
sell other services and provide a forum for farmers to sell.
Interlinked schemes that incorporate input supply, output marketing and related
credit arrangements are likely to become more important in the years to come, partly
because consumers often demand more information on the commodities they consume.
4.14 Weather Insurance. e.g., ICICI Lombard
ICICI Lombard General Insurance Company Limited has launched index based rainfall
insurance with the clients of Krishna Bhima Samruddhi, a Local Area Bank in Andhra
Pradesh.43 An index was created based on an analysis of historical correlation between
rainfall and crop (groundnut) yield. Assigning weightages to critical time periods creates
the index. The past weather data is then mapped on to this index to arrive at a normal
threshold index. The actual weather data is then mapped to the index to arrive at the
actual index level. In case there is a deviation (in either direction Ű excess or deficient)
between the normal index and the actual index, compensation is paid out to the insured
on the basis of a pre-agreed formula. For the purposes of the contract, the measurements
are tracked at a reference weather station. The farmers purchase the insurance contract
42 Financing Commodity-Based Trade and Development: Innovative Agriculture Financing Mechanisms Report
Prepared by the Unctad Secretariat.

43 The Krishna Bhima Samruddhi Bank is the local area bank of the BASIX group of companies.
46
directly and in the event of the payout, the bank receives the payout as an agent of its
clients. The bank, to settle interest or principal payments payable to it in the event of
rainfall shortage may use this amount. ICICI Lombard has now rolled out this facility in
other states like Madhya Pradesh, Uttar Pradesh, Himachal Pradesh, Rajasthan.
4.15 Rural Housing - Computerization of Land Records - Karnataka
Land records form the base for all land reforms and therefore regular periodic updating of
land records is essential in all states. Under Karnataka’ Land Records Computerization
Project - Bhoomi all 20 million land records of 6.7 million landowners in 176 talukas of
Karnataka have been computerised. This system works with the software called “Bhoomi”
designed fully in-house by National Informatics Center, Bangalore. While the project
is largely funded by Government of India, some critical components of this project are
funded by State Government.
“Bhoomi” is very comprehensive software designed by NIC, Bangalore. This software
provides for printing of land records as and when required. It incorporates process of
online updating to ensure that the RTCs provided to the farmers is in sync with the
time. The manual land records in operational talukas have been declared illegal. All the
mutations to the land records database are done on the computer itself so as to ensure
that data on computer remain current with time. Such computerization of land records
will give boost to credit requirements of rural areas.
4.16 Watershed Project by NABARD
NABARD has created Watershed Development Fund during 1999-2000 with Rs. 1. 00
billion contribution from NABARD and matching up-front contribution of Rs. 1. 00 billion
from GOI, in the country. Two-third of the fund i.e., Rs. 1.33 billion will be used for
providing loans to the identified State Governments for Watershed Development and one-
third i.e., Rs.0.67 billion would be used for grant based activities covering promotional
efforts, capacity building, Self Help Group related activities etc. The scheme is being
implemented in eight (8) districts i.e., Srikakulam, Vizianagaram, Chittoor, Cuddapah,
Rangareddy, Medak, Karimnagar, Warangal.
47
5 Benchmarking with International Experiences
Benchmarking with International Experiences Directed Towards Enhancing Invest-

ment Credit/ Infrastructure Creation
5.1 Private Rail Franchisees in UK
Private rail franchisees44 are examples of provision of public subsidies to private opera-
tors to boost the return from otherwise unprofitable activities. The private rail franchisees
rights have been accompanied by the provisions of public grant subsides with the fran-
chisee being awarded to the company requiring the lowest subsidy. At the same time
strict quality and service obligations are put in place such that the infrastructure cre-
ated is maintained in good working conditions. This has led to efficiencies in offering
services to consumers with minimum and fixed drain on public resources. Provision of
infrastructure in the rural areas such as building of rural power projects, rural roads,
R & D centers, common infrastructure facilities could be tried out in India using similar
model. Rather in the economic survey of 2005 Government of India has hinted upon this
approach for undertaking certain infrastructure projects.
5.2 Guatemala: Gensis Empresarial (GE)
GE45 in Guatemala was established in 1988 for ameliorating the lives of the lower in-
come groups. GE took upon the initiative to offer micro credit to its members through
its network, which stretches the entire span of Guatemala. GE has now grown as the
largest provider of micro credit in Guatemala. Apart from offering financial products in
form of loans GE also provides technical assistance and training to its members. The
product portfolio of GE includes micro enterprise loans to individuals and groups and
infrastructure loans to poor rural communities. Infrastructure loans are longer duration
loans (say for a period of 4 years), specifically designed for the rural electrification pro-
gram of Guatemala. The rural electrification program of Guatemala has been initiated
by the rural communities themselves and the members of the rural community have to
contribute equally for the cost of electricity connection if they have to receive the govern-
ment subsidy for rural electrification. GE extends infrastructure loan, which is used by
44 Source: Accessing Finance For The Supply And Purchase of Infrastructure Services by Mark Cockburn,
Michael Dyson, Michael.A. and Neil Kenward.

45 Source: Ruster, 1999.i n Accessing Finance For The Supply And Purchase of Infrastructure Services By
Mark Cockburn, Michael Dyson, Michael.A. and Neil Kenward.
48
the beneficiary to pay up for his contribution to the rural electrification program. The
infrastructure loan is given to group of individuals of similar income group/ profile with
all the group members having joint liability for loan repayment.
Peer pressure ensures high (more than 90 percent) repayment rates and low defaults.
Another design feature of the infrastructure loan is that all the individuals in the group
have similar tenure/repayment terms depending upon the income profile and repayment
capacity of the group. On a per household basis GE extends loan up to USD 450 in the in-
terest range of 21-30 percent for rural electrification purposes. GE uses local commercial
banks for handling disbursements and collections. The community electrification infras-
tructure loan started in 1993 has resulted in disbursal of USD 35.0 million through 1000
group loans and has benefited 8700 families in a 5-year period. The model not only lowers
the burden of public funding for the rural electrification drive but also ensures long-term
sustainability to the rural electrification program as the beneficiary have a share in the
assets created. In India too such kind of model could be used for ushering community
owned rural electrification.
5.3 Leasing and Hire Purchase Models. e.g, Kenya Solar PV
Leasing could be a good alternative financial solution for meeting infrastructure/ asset
requirement needs of the poor and lower income groups. For instance leasing as model
has been extensively used for selling household PV solar systems in Kenya.46 The high
cost of PV solar systems is spread over a period of years with the solar PV system leased to
the beneficiary in lieu of lease payments. Once the payment of the cost of the solar system
along with the interest payment is recovered through lease payment, the ownership of
the solar system is transferred to the beneficiary. Lower lease payments spread over a
number of years enable poorer households to purchase high cost assets. At the same
time lease model is excellent for the funding agency as there is an inbuilt disincentive for
the beneficiary in case of default/delayed payments as he gets the ownership of the asset
only upon full recovery and a default in the intervening period could ruin his chances of
owning the asset. Similar model could be applied here in India for high cost assets such as
tractors and other modern farm implements. Similarly it can have other applications such
as for provisioning houses, farm implements and other assets for the rural communities.
46 Source: Accessing Finance For The Supply And Purchase of Infrastructure Services by Mark Cockburn,
Michael Dyson, Michael.A. and Neil Kenward
49
In fact banks like ICICI Bank as has been mentioned earlier are already working with
organizations in the business of supplying Solar solutions companies for making Solar
PV systems (which are viable alternatives for rural electrification) affordable to the rural
customers through the lease model.47
5.4 Utilities Extending Credit. e.g., Chilean Rural Electrification

Program
Utilities offering services in the rural areas could also be the vehicles for offering financial
products and services. Rather they are more suited for the same in view of their relation-
ship and proximity to the customer. For instance in Chile,48 under the rural electrification
program, the households are required to pay 10 percent of the electricity connection cost
to the electricity utility. The utility extends credit to the beneficiary in form of spreading
connection costs over a period of time and charges interest on the same. This has not
only benefited the consumer by making the connection affordable to him but also added
to the income of the utility. The utility wields considerable influence over the repayment
by the beneficiary as they snap the connection of the consumer on non-payment of dues.
Thus the service acts as an effective collateral equivalent for the utility in this case. This
kind of approach could also be adopted by electricity utilities in India.
5.5 Tradable Water Rights and Resource Allocation - Chile’s Experi-

ence
Chile has also been a pioneer in ushering tradable water rights.49 The concept of tradable
water rights was introduced in Chile in 1981. Under the system, while existing users of
waters were awarded property rights free of charge, the new property rights were sold
through auction. The property rights covered under Chile’s civil code can be freely traded
in open market and have legal value. The property rights having economic value can also
be offered as loan collateral.

In Chile, property rights were allocated for consumption and non-consumption pur-
poses (hydro-electricity) purposes. The introduction of tradability of property rights has
47 Detailscould be accessed from the Micro Finance and the Rural Infrastructure Finance team of ICICI Bank.
48 Source : Accessing Finance For The Supply And Purchase of Infrastructure Services by Mark Cockburn,
Michael Dyson, Michael.A. and Neil Kenward
49 Water Supply Sector report Part 2, Also refer Holden, P and Thabni,: Tradable Water Rights: A World bank
Policy Research Working Paper.
50
resulted in realignment of the consumption and use pattern of water. For instance the
city of La Serena has abandoned for the time being the idea of constructing Puclara dam
for meeting its increasing water requirements, as they are able to purchase excess water
rights from farmers in the near vicinity. In view of market demand for water from the
city, the market value of the water rights held by farmers is higher than its value in the
agriculture use. This has prompted farmers to adopt efficient irrigation systems such
that their water consumption is reduced and the rights of the saved water can be sold
to the city at higher prices. This has resulted in multiple benefits such as efficient uti-
lization of water, ecological gains from reduction in salinity due to excessive use of water
(Thobani 1995). The tradable water rights has also resulted in better water management
by the water utilities like EMOS in Chile who now chose to save more water to service
the growing requirements of customers rather than purchasing fresh water rights. The
introduction of this model has ensured efficient utilization of scarce resources and at the
same time award of free water rights on the basis of previous consumption levels ensured
adequate safety nets for the poor.
5.6 Teba Bank in South Africa
Teba Bank50 initially started as Teba Savings Fund and was set up by the Employment
Bureau of Africa Ltd. (Teba) in 1976 for servicing the workers of the mining industry. As
part of the services offered by the fund, miners’ salaries were made accessible at any of
the Teba Savings Fund offices situated on the mines or at Teba Ltd. offices. During the
period of 1976-2000, Teba Fund serviced over 0.8 million savings accounts. In July 2000,
Teba Bank was grated banking license by the South African Reserve Bank, which paved
its way for diversifying its services beyond the mining industry. The portfolio of financial
product and services with the bank now includes product such as fixed deposits, savings
accounts, micro-loans, housing loans and financial management advisory services. It is
constantly rolling out new products for its increasing base of customers. Recently it has
also entered into insurance business and has piloted a funeral insurance product. It has
also launched a targeted savings account.
The Teba Bank outlet network covers almost all the gold and platinum mines. It has in
place more than 70 outlets at the mine hostels. Bank officials such as Tellers, Service Ad-
50 Source: Paper on Enhancing Flow of Credit to Agriculture and Rural India by D Chattanathan and Bindu
Ananth
51
visors and Loan Officers provide customized help to customers at the outlets. Teba Bank
has installed more than 37 ATMs near the mines to provide 24-hour access to funds to
its clientele. The ATMs are linked with the nation-wide Saswitch network, through which
the Teba Bank customers at more than 10,000 ATMs countrywide can access funds.
Moreover, Mineworkers and their beneficiaries can also access their savings accounts at
select agencies in rural areas in other African countries. Another step towards providing
convenient banking to its customers is by introducing the facility of cash withdrawal (and
deposit) through the local groceries.
Effective utilization of technology for linking branches with the remote rural locations
has been done so that real-time transaction processing can be facilitated. Teba bank
is continuously diversifying its products portfolio, entering into new business segments,
launching new delivery channels for retail banking, introducing facilities like anywhere
banking through centralised operations for its clientele. Constant improvisation has en-
abled it to service its customers effectively and increase its client base over the years.
It has created its own benchmark in niche marketing and has also evolved itself as a
complete financial products and service provider.
The success story of Teba Bank demonstrates how effectively a bank can customize
its products, services and delivery channels to cater to the various credit requirements of
the customers. With the emergence of connectivity and transaction51 devices in India, the
agent-based models can be effectively utilized especially to target the rural segments. The
edge of agent based model vis-à-vis traditional delivery model (especially in the context
of rural areas) is that agent model could be utilized for delivery of multiple products and
services thus economizing its overall costs. However, the challenge in developing scaled
agent based model lies in putting in place adequate mechanisms for detection/ control
of fraud and designing incentive for the agent such that his interest is in alignment with
the interest of the provider.
5.7 Rural Bank of Panabo in Philippines
The Rural Bank of Panabo52 (RBP) is credited with introducing the “cooperative con-
cept” approach in 1986. RBP invested in setting up a joint venture called Panabo Agro-
51 Also refer ‘A Blueprint for the Delivery of Comprehensive Financial Services to the Poor in India’ by Ananth,
Bindu et al (2005)
52 Source: Report on Financing Commodity-Based Trade and Development: Innovative Agriculture Financing
Mechanisms by the UNCTAD secretariat.
52
Industrial Corporative (PAICOR), which is basically a rice mill and provides all the services
to the farmers relating to the production, processing and marketing of paddy. The main
objective of investing in PAICOR was to allow farmers to become owners of a mill and pro-
vide capital and management support to the cooperative. PAICOR provides production
and investment credit to farmers who repay in kind by delivering paddy directly to the
mill, which they co-own. The initial investment capital to drive the scheme came from
RBP’s paid up share capital. The farmers paid their shares through the paddy deliveries
to the mill over a period of 4 years. The share of farmers increased to 45 percent by the
year 1992. Professional financial and management control by RBP is one of the major
reasons for the success of PAICOR model. Similar models could be developed here in In-
dia with government initially setting up the infrastructure with the help of private entities
and then share of beneficiaries could be progressively built with corresponding decline
in government equity. This kind of approach could be found useful for funding of rural
infrastructure projects such as water supply, processing plants, warehouses and market
infrastructure etc.
5.8 Floriculture Finance in Zimbabwe
Floriculture as a venture holds good potential with effective supply chain and market
linkages. Banks in India however, have had not so positive experience in funding in the
floriculture especially in 90s. One of the success stories in the floriculture funding is the
Zimbabwe Floriculture finance model,53 which was introduced by a United Kingdom in-
vestment bank, Singer and Friedlander, in 1997. The bank helped establish a specialized
company, Hortifin, which had a dual responsibility of acting as the agent for eligible flower
growers for marketing of their produce on one hand and monitoring growers (for ensuring
utilization of funding for floriculture production) for ensuring production of high-quality

flowers. Hortifin tied up the marketing function with an established professional flower-
marketing agency and freight forwarding company called Winglora. Funding to the extent
of US $ 60.0 million was extended to finance the equipments used for growing and ship-
ping flowers. The repayment under the model is deducted from the selling point through
an offshore special-purpose account pledged to the lender, to which all sales are as-
signed. The success of the model lies in the fact that the funding agency has provided
Mechanisms by the UNCTAD secretariat
53
services more than funding which may be critical in new sectors - it has facilitated in the
quality/production aspect and also arranged for the marketing of the product perhaps
realizing that investment in quality and marketing support can indirectly lead to spurt in
floriculture credit off take.
5.9 Bundling Credit and Insurance in Pakistan
In Pakistan, a joint project54 between a bank and farm input company was launched
in December 2003, which was also supported by the United Kingdom’s Department for
International Development. A smart card targeting medium-sized farmers having 5 to 20
hectares of land and growing wheat and cotton was launched. Under the arrangement
worked out, 15 per cent of the input companies’ margin is passed on to the bank for crop
insurance and loan loss provisioning.

Similar model can be introduced in India with input companies/ companies entering
into contract farming providing some kind of comfort to the lending banks. Additionally,
Credit information tracking and sharing enables lenders to provide incentives to those
with good credit history and provides a strong deterrent to willful default. This will also
facilitate transition to individual lending programmes over time. NABARD may play an
important role in this initiative.
5.10 Cattle Financing in Columbia
In Columbia several agricultural financing cases have been structured as securitizations,

through notes traded on the National Agricultural and Livestock Exchange (BNA). For
instance, cattle farmers obtain the credit for production of cattle, at rates determined
through competition among institutional investors on the country’s stock and commodity
exchanges. Competition ensures not only good rates but also prompt delivery of services.
Commodity exchanges in India could as well dwell upon the idea and could pilot for select
cases.
Mechanisms by the UNCTAD secretariat.
54
5.11 Banking Correspondents (BCs) in Brazil
BCs have been utilized optimally in Brazil55 for servicing the requirements of the rural
and the unorganised sector. In 1999, the banking regulation was modified to allow banks
to appoint BCs for catering to the requirements of the underserved sections. This has
led to appointment of several BC’s across the country which in turn has increased the
access of financial products and services to the hitherto unorgnised sector. The multi-
fold growth in terms of reach to this section is evidenced by spurt in point of sales,
which has grown by more than 200 per cent. Currently, there are 17,000 bank branches
and almost 27,000 providers of banking correspondent services in Brazil. The business
being generated through the BCs can be gauged from the fact that in the first semester
of 2004, BCs were involved in more than 500 million transactions involving 40 million
people.”56 BCs have led to acceleration of credit provision in the rural areas and similar
strategy could be worked out in India. This would require modifications in our banking
regulations as well. In the current budget indications on similar lines have been given
which is a positive development. Plans are afoot by banks like ICICI Bank to use SHG
and Micro Finance Institution network for selling their products and services to the rural
customers.
5.12 The Chinese Experience of Town and Village Enterprises
China has been successful in creating Town and Village Enterprises (TVEs) acting as rural
business hubs. These hubs consisting of agro based and non-farm based enterprises
have adequate backward and forward linkages, access to quality technical support and
receive continuous training on the business aspects. The professional handling of the
rural hubs has boosted the rural per capita income and created a number of business
opportunities at local level. The centers have also developed as suppliers of products and
services to nearby urban centers. This model has given boost to industrial growth in
rural areas of China. The TVEs essentially played the twin roles of (a) ensuring robust
and balanced growth in China and (b) positive impact of growth in rural areas such as
reduction in poverty levels.
A dedicated Township Enterprise Board (TEB) has been put in place, which ensures
55 Source: Paper on A Blueprint for the Delivery of Comprehensive Financial Services to the Informal and
Unorganized sector by Puneet Gupta and Rupalee Ruchismita.
56 Gomes, Amaro Luiz de Oliveira, Banco Central do Brasil in the National Conference on “Regulation of
Microfinance in India” New Delhi, India 19 Ű 20 January, organised by Sa-Dhan, 2005.
55
that the town and village enterprises produce agricultural inputs, farm machinery, agro-
products and other low value-added goods. Several such enterprises were started by the
farmer’s cooperatives, which engaged surplus labour in the rural areas. Cheaper cost and
higher efficiency at some of the TVES has resulted in the shifting of production or out-
sourcing of production from urban centers to these rural centers. This has boosted rural
economy and consequently fuelled rural demand. The TVEs have thus propelled rural in-
dustrialization and led to diversification of activities at rural level more from agriculture
to manufacturing and service. Government of China has developed special schemes for
funding use of technology in rural areas through technical training for practical use. The
state also encourages organized migration and continuously strives to help people migrate
out of areas with extreme difficult living conditions to areas with higher employment av-
enues. A similar kind of investment in creation of viable economic growth centers in rural
areas coupled with organized movement of labour in India could ensure balanced growth
and solve migration/unemployment problems. Potentially rural hypermarkets can be a
good way to start the same in India.
5.13 Saving the Forest with a Timber Lease in Guyana
There has been a continuous degradation of the world forest resources in the recent past
due to growth in population and modernization. Tropical forests in the entire world for
example are diminishing at a rate of 33.8 million acres a year resulting into almost halving
the area under forest cover since 1800 a bulk of which has been effected in the past five
decades. In light of the same, a novel approach to protecting forestlands has began in
South America where a US-based nonprofit organization, Conservation International (Cl),
has implemented the world’s first conservation concession” in Guyana.57
The concession terms have been designed such that, CI has leased a large forest
area in Guyana at market rates, and it will be responsible for protection of the area and
conservation efforts rather than for commercial gains. CI has paid an application fee (US
$20,000) and an annual fee of $0.15 per acre for which it has been granted a permit for
a three-year exploratory period. CI would also invest its own funds for the development
of the forest area. The lease could be extended for 25 years after the end of exploratory
period and the annual fee payable would also be reviewed at the end of exploratory period.
This is a novel way to develop and enrich our natural resources. A better strategy could
57 Source: Global Environmental Change Report Vol XII, No. 19, 13 October 2000.
56
be to offer on rotation basis, natural resources for conservation efforts. This would not
only help in enriching / making sustainable our natural resources but also increases the
value of the resources. After a point of time, perhaps part of it could also be commercially
exploited (again on rotational basis) with adequate care to ensure sustainability.
5.14 Indonesian Experience for Funding Maintenance of Irrigation

Projects
A typical problem that has been plaguing almost all the developing nations is creation of
public assets, which after a point of time deteriorate due to lack of operations and mainte-
nance leading to colossal wastage of public funds spent on the assets. Part of the reason
lies in lack of proper selection of sites rendering the assets not usable or assets are cre-
ated with no fund provisioning for maintenance with the result that over a period of time
they are rendered non usable. The government thrust continues to be on the numbers
increased and not on the performance of the assets that have already been created, such
that more such non-performing/under performing assets are created. One of the novel
ways to address this problem is by adopting the Indonesian approach for maintenance
of irrigation projects.58 In collaboration with the World Bank and the Government of the
Netherlands, the Government of Indonesia (GOI) has instituted a irrigation improvement
fund (KIIF). The fund is set up at district level using district and/or provincial funds and
also loan funds/ grant funds for start up. The funds are allotted among irrigation sys-
tems to federated Water User Associations (WUAs) that submit proposals for undertaking
operations and maintenance work. The proposal includes the investment plan by WUAs
to undertake maintenance work. An minimum standard of maintenance and quality pro-
visions are stipulated and projects are allocated to the established WUA on the basis
of criterion such as maintenance plan, WUA investment being put up, number of farm
families to be benefited. We could also think in terms of adopting similar kind of model
for ensuring up gradation and maintenance of our public assets by essentially involving
private sector and the stakeholders/ locals.
58 Prepared by Douglas L. Vermillion for Seventh Seminar of the International Network for Participatory Irriga-
tion Management, Albania, June 2004.
57
5.15 Private Sector Rehabilitation & Management in China
Another example of maintenance and rehabilitation of public assets by private entity can
be quoted from China. In the Guanzhong, Shanxi Province a retired irrigation district
employee has taken the work of financing and supervising rehabilitation of a lateral canal
(including the intake structure) serving 133 ha. The private entity has agreed to invest
US $10,600 to rehabilitate the canal and its headworks in lieu of a 20-year extendable
lease O&M service contract with a payment rate of US $0.375 per 100-m3 water delivered
to farmers. The Water users in the service area of the lateral canal agreed awarded the
contract to the private entity. The private entity put up its own funds as well as borrowed
funds from the commercial banks on the strength of the contract.
Rehabilitation and improved O&M paid rich dividends to the water users as it re-
sulted into an increase of discharge into and through the lateral canal from approximately
300,000 m3/year before the rehabilitation and O&M contract to 500,000 m3/year after
implementation. The service area increased to 187 ha from the previous level of 133
ha. Similarly the private entity was able to earn substantial revenues to sustain his
investment in the project. The model stands out as an example of the pay-for-service
arrangement, which created a viable profit making opportunity. The payment for the ser-
vices in this instance came from the water users themselves who directly benefited from
the contract. On similar lines payments for certain public assets rehabilitation, O&M
could come from the government, however for sustainability it would be advisable to en-
sure that stakeholders give some payout and are involved in the award of contract and
O&M works.
5.16 Indian versus Korean Irrigation Agencies - the Human Resources

Aspect
Private participation in irrigation infrastructure including taking up irrigation projects

under the Public-Private Partnership mode has been initiated in the recent past in India.59
However, we have a long way to go in instilling a successful and sustainable partnership
model. One of the aspects for success of any program is the Human Resources aspect
as ultimately it is the people who implement the project. This becomes more relevant in
case of public agencies specifically with regards to the training, management and project
59 Prepared by Douglas L. Vermillion for Seventh Seminar of the International Network for Participatory Irriga-
tion Management, Albania, June 2004.
58
execution skills of the bureaucrats involved in the project implementation.

In 1994, the World Bank commissioned a study, for comparison of irrigation bureau-
cracies in India and Korea to find out enabling conditions for creating competent, service
oriented agency capable of strengthening WUAs. The findings revealed characteristic dif-
ference between the two bureaucracies some of which have been compared below:
• In India the bureaucratic system is well entrenched and promotions are based on
numbers of years of service and not performance while in Korea the promotions are
based on the quality of staff performance and teamwork. Even the selection process
for irrigation staff is based on merit criterion in Korea
• In India training is provided to technical officers at the time of joining however,

after that even after 20-30 years of service no refresher courses are conducted for
the technical officers while in Korea in service trainings is a regular feature which
updates the knowledge base of the irrigation staff
• The Revenue Department collects fees from farmers in India in case user charges
are existent while staff contractors undertake maintenance work. In Korea, major
part of the revenue for the agency comes from water charges; therefore the staff pays
more attention to the needs and requirement of the farmer’s body. Incentives are
given to water users who pay early bills. In Korea staff themselves contribute their
labour for canal maintenance.
The study brings out the stark contrast in the Indian and Korean approaches and
concludes that in view of lack of service or customer orientation in India vis-à-vis Korea,
there is low quality of service offered and also inefficient management of irrigation assets.
The Korean example could as well be replicated in India with more emphasis on customer
orientation and trainings for irrigation staff. Introduction of incentive based structure for
public agency staff could go a long way in improving the quality of services offered here in
India. Recognition through citations and small rewards could also be used as alternatives
to monetary performance linked incentives to create zeal for service in the Indian context.
Investments in form of trainings, customer orientation, institutionalization of some form
of PLI will be required to improve the quality of services offered by the public agency.
Further joint anchoring of projects with private entities can also instill much needed
professionalism in the public agency approach in a gradual manner.
59
5.17 Supporting Environment for WUAs in the United States
United States has a well-defined network for irrigation management60 at different levels.
While mutual companies owned by water users are used for development and manage-
ment of relatively small and medium-scale irrigation systems, irrigation districts, which
are quasi-municipal governments set up by state governments, manage medium to large-
scale irrigation systems. Farmer-elected boards of directors who hire professional man-
agers for the management and operations of the irrigation system govern both types of
assets. Water Users have traditionally enjoyed strong legal and political support in US.
For example, WUAs have the rights to deny delivery of water, withdraw voting rights and
even confiscate land from farmers who do not pay water fee.
Agricultural extension is provided both by the state universities and private companies
who provide a wide range of support for inputs, equipment, marketing and business
matters. WUAs often form federations or networks to share information, work together
on common problems, sponsor study tours, and lobby the government on certain issues.
Near urban areas, cities have developed agreements with some districts to pay for lining
or other water conservation efforts in exchange for use of water saved.
The irrigation agency in US initiated reforms in response to low potential for further
water development, rising sensitivity to environmental problems, and the rising cost of
water investment programs. A series of steps such as conversion of irrigation agency
USBR from a development agency to a management and regulatory agency, reduction in
staff by 25 percent, flattening of organizational structure, simplification of procedures,
and decentralization of authority were undertaken. The US model of irrigation has thus
been very reform oriented and changes have been made to kept in pace with time. Lo-
cal management by the farmer, legal sanctity to WUAs and strong partnership with the
private sector are other hallmarks of the US model, which could be implemented here in
India.
5.18 Lease Contract in Malaysia
Malaysia also initiated a number of measures in the irrigation sector under public private
partnership. The Kelantan Water Company was the first water supply utility to be priva-
tized in Malaysia. Rather the model is of long-term lease contract and not complete di-
vestiture. The existing assets were transferred to Kelantan Water Company, which owned
60 Source: Nelson, 2001; Svendsen, ND; Thompson, Jr., 1993; Wahl & Simon, 1988
60
all equity. However, under the arrangement worked out, equity is to be transferred to the
state over the life of the contract such that by year twelve, 50 percent of the company’s
equity will have been transferred to the State and by the end of the concession the State
will own 70 percent of the equity.
The contractor leases the existing assets at zero cost. Under the contract, the wa-
ter supply company is responsible for water production and distribution; operation and
maintenance; billing and collection with payment into an escrow account. Fees to the
private utility is paid from the escrow account on the basis of performance in terms of
production, number of connections and reduction in non-revenue water. The water tariff
however continues to be determined by the Government. According to newspaper re-
ports, the Government hiked water tariffs to a level sufficient to pay to the private utility
its contract service fee. But in view of public resistance to the hike, it revoked the hike
and instead incurred the deficit to pay the service fees to the private entities. Neverthe-
less Public Private Partnership in the management of irrigation assets has led to lot of
improvement in terms o production, operations and conservation efforts. We could also
think in terms of privatizing the operations and maintenance of some of our public assets
either in full if possible or on lease contract basis as has been suggested above.
5.19 Joint Funding of R&D by Private Parties and Government in

Australia
Investment in research and development has helped rural industries in Australia61 be-
come more competitive, profitable and environmentally sustainable. The R&D activities in
Australia are undertaken by rural R&D Corporations (RDCs). RDC model is a successful
investment management model, unique in the world, and represents a true partnership
between Government and Industry. This partnership is based on the Commonwealth
Government’s commitment to match dollar-for-dollar industry contributions to 0.5 per
cent of each industry’s gross value of production. In 2000-2001, rural industries and
the Commonwealth Government each invested $173 million by way of industry levies,
matching dollars and appropriation funds. With these monies, and drawing on reserves
and other income sources, the RDCs funded more than $364.0 million of rural-related
R&D. The Government’s continuing investment in rural R&D confirms the importance
placed on the RDCs to deliver benefits to industry, the wider community and preserv-
61 Source: www.affa.gov.au
61
ing natural resources, particularly in rural and regional Australia. Government funding
allows rural industries to invest in wider ‘public good’ R&D that promotes sustainable
natural resource use, environmental quality, improved food safety and improvements in
occupational health and safety. This is an excellent model and could be implemented
here in India especially with reference to the R&D projects.
5.20 Community Participation in Rural Roads
In many countries, the costs of local access roads62 are shared between government and
benefiting local communities. For instance private road cooperatives manage about 70
percent of the road network in Sweden, with subsidies ranging from 40 to 80 percent from
government. In China, the model is such that government provides material, equipment,
and technical assistance, while local communities provide voluntary labour for road con-
struction. In Finland, 78 percent of the road network is privately owned and managed
through road cooperatives, which receive funding support from central government, mu-
nicipalities, and cooperative members. In Lesotho, government provides limited financial
assistance and training in labour-based work methods to villagers who wish to construct
rural roads and paths on a voluntary basis. In India, in Uttaranchal State and parts of
Punjab, paths, tracks, and footbridges are being constructed on a cost-sharing basis with
local communities located in remote and inaccessible areas (under the Integrated Water-
shed Management Project). Communities generally contribute voluntary labour and are
actively involved in planning and execution of works. In some cases, communities vol-
untarily construct the road formation, and cross-drainage works are provided under the
project.
62 Source: Paper on Rural roads by Ashok Kumar, Zhi Liu, Piers Vickers
62
6 Scope of Scaling and Barriers to Scale
Most of the innovations cited above have been created because of market forces and the
need to effectively utilize and harness the available resources. Institutional innovations
discussed above could help deliver quality services in rural areas. Improved finance
methods have the potential to turn the vicious cycle of poverty into a virtuous cycle of
growth.
Most of the examples cited above are commercially viable based on the model where the
users of the utilities are charged. This allows replication on a large scale even in Indian
context particularly in areas of management of water through Water Users Associations,
etc. Some of the innovations cited have been tried in areas with practically no scope for
realizing user charges. In those instances support to utility provider has been given by
government on a rational basis and again fixed deliverables. There is lot of scope for
replicating a few of above experiences here in India. However, there are a few constraints
that impair scaling up:
• Lack of a concept of user charges for farmers/people residing in rural areas. Free
provision of power, irrigation etc in the past makes it considerably difficult for the
beneficiary in the rural areas to accept user charges unless demand from services
emanates from the locals themselves.
• Lack of awareness among the rural populace is another stumbling block. Awareness
would need to be created in farming/rural community regarding timely payment of
utility charges for uninterrupted quality of service and resultant benefits by way of
increased efficiencies.
• Inequity in income and wealth in the country makes certain section of Indian rural
population more vulnerable due to such utility payments. In such case, government
could resort to reimbursement of utility charges on a timely basis to the extent of
dues payable by such person to private utilities. Alternatively a minimum quantity
of water can be provided to all users free of charge.
• Frequent policy changes by government (especially on the charges front), local lob-
bying with reference to waiver of charges etc. are other impediments for scaling
up
63
7 Focus areas for enhanced investments
Focus areas for enhanced investments and higher credit flow to agriculture
For increasing flow of investment credit in India there are certain focus areas, which
merit more attention like food processing, irrigation, warehousing and cold storage in
addition to the provision of basic infrastructure facilities like roads, power and telecom-
munication.
7.1 Food processing
The size of the Food Processing Industry is estimated at Rs 3150.00 bn (US $70bn),
including Rs. 990.00 bn (US $22bn) of value added products. The Food Processing In-
dustry is estimated to grow at 9-12 percent, on the basis of an estimated GDP growth
rate of 6-8 percent. The total exports of the Food Processing Industry in 2001-02 were
Rs136.00 bn and the target exports for 2002-03 was at Rs146.00bn. Marine products
export was the single largest constituent of the total exports of processed foods contribut-
ing over 40 percent of total processed food exports. The total size of the Indian snack
food market is estimated to over 400,000 tons in volume terms and Rs100.00 bn in value
terms and is growing at over 10 percent for the last three years (2000-2003). The three
largest consumed categories of packaged foods are packed tea, biscuits and soft drinks.
For value-addition to take place, attracting foreign and domestic private investment in
the sector is crucial. In the first few years of the economic reforms (1991-92), when the
industry was opened and major impediments on FDI removed, a total investment of Rs
72.00 billion was committed. This trend was reversed when excise duty was first intro-
duced in 1997-’98.
There is a lot of scope for enhancing investment in the food-processing sector and it
would lead to multiple gains across the value chain to the concerned stakeholders. Less
than 2 percent of fruits and vegetable production of the country is processed presently,
compared to 30 percent in Thailand and 70 percent in Brazil. Value addition in the do-
mestic food sector is less than 7 percent. Food processing must be raised to at least
10 percent of total fruit and vegetable production, which would entail an investment of
Rs 1400.00 bn. It is estimated that the sector can provide direct employment to 54,000
persons on an investment of Rs 10.00 billion in comparison to 480.00 bn in textiles and
250.00 bn in paper industry. Higher investments in food processing sector by private en-
64
tities would also result in higher demand for investment credit. For the promotion of the
sector there is need to harmonize food laws, attract large integrated food procurement-
cum-distribution companies in addition to small-scale sector, which are the major enter-
prises contributing to this sector presently. In a medium term of 5-10 years there is a
need to propagate non-polluting, cheap technologies example irradiation and biotechnol-
ogy for preservation of food. There is also a need to introduce ‘command area concept
for processing units’ in order to ensure consistent and assured supply for farm produce.
Institutional arrangements Ű Farmer Service Centers (FSC) and Value Added Centers
(VAC), are required for establishing linkages between the farmers and processing units.
The growth of a viable food processing industry is also dependant upon round the year
flow of quality produce. Effective backward and forward integration would be required
for assured flow of produce to the industry as well as increase in acreage of horticultural
crops.
7.2 Irrigation
Irrigation contributes to agricultural production by raising productivity, increasing mul-

tiple cropping and also enabling change in cropping pattern. For market led production
care would need to be taken to expand the irrigation infrastructure in the country which
would lead to productivity gains resulting in higher incomes to the farmers and conse-
quently support flow of higher investment credit in the agriculture domain.
Indian irrigation sector has witnessed steady growth since the independence. Cur-
rently in our country only 40 percent of the cropped area is irrigated, which still leaves
a huge potential for major irrigation projects. As per the Economic Survey of 2003, the
country’s area under the Ultimate Irrigation Potential (UIP) was 138.9mn hectares of
which 58.46 m. ha. is under major (CCA more than 10000 ha.) and medium irrigation
(CCA of more than 2000 ha. Up to 10000 ha.) and 81.43 mha under minor irrigation
projects (CCA up to 2000 ha. India Water Vision, 2025 estimates the gross water demand
for multiple uses to double in 25 years from now with corresponding investment needs of
Rs 200bn per year. A huge chunk of this demand is expected to come from agriculture.
Additional investment of approximately Rs. 120.00 billion would be required in next 5
years to irrigate a substantial part of nation’s dry lands. The agriculture sector in India
uses 85 percent of the country’s available fresh water. However, irrigation efficiency is
only 20-50 percent. So Indian agriculture wastes up to half of the country’s fresh water
65
supply. Investment of Rs. 1050.00 bn is required for completion of 444 on going major
and medium irrigation projects. Investment of Rs. 245.00 bn is required for recharging
36 billion cubic meters of ground water to cover approximately 10 million ha area.
Investment should be promoted for better and efficient water management through
usage of watershed, check dams, drip, sprinkler, mulching, water harvesting structures
technology, better drainage etc. The present coverage under drip irrigation is 0.5 m ha
and under sprinkler irrigation the coverage is 0.7 m ha. The potential for coverage under
drip and sprinkler irrigation is estimated to be about 27 and 42.5 million respectively.63
The benefits from drip technology are multifold, for instance, the saving of water by drip is
about 29 percent, 37 percent and 44 percent per ha respectively for banana, grapes and
sugarcane while the economic viability of drip investment, assessed through Net Present
Worth (NPW) and Benefit Cost ratio (BCR) works out to be about Rs. 0.2 million/ha for
banana, about Rs. 0.5 million/ha for grapes and 0.1 million/ha for sugarcane at 15
percent discount rate at the end of life period of a drip set.64 Considering the past trend
and available infrastructure facility with the industry 3.0 m ha must be targeted to be
put under micro irrigation during the 10th plan and another 14 m ha during the 11th
plan. This would require an investment to the tune of Rs. 105.00 bn during the 10th plan
and another 510.00 bn during the 11th plan. Private participation in the irrigation sector
should be promoted in line with the NHAI concept to complete all the major irrigation
projects.
7.3 Post Harvest including warehousing and cold storage
About 30 per cent Indian farm produce is stored under open condition, leading to wastage
and distress sale. If the consumption level shoots up from the current 100 gm of fruit and
200 gm of vegetables per capita per day to at least the recommended dietary level of 140
gm and 270 gm respectively by 2010, the domestic market for fresh fruits and vegetables
could be as large as Rs 50,0. 00 billion at present price structure. However, this would
require commensurate supply chain infrastructure in terms of handling, storage etc. Post
harvest stock stocked in public warehouses is estimated to value at Rs.935.67 billion of
which 12 percent gets wasted due to lack of quality storage. Preventable post-harvest
losses of food grains are estimated at about 20.0 million tons a year, which is nearly 10
63 Source : India Infrastructure Report 2004;Paper on Getting Water from Public Private Partnerships by
Ashima Goyal
64 Source: Report of the Task Force on Micro Irrigation in India
66
per cent of the total production. Food grains wasted during post-harvest period can feed
117.0 million people for a year.
A more balanced approach to crop production and post-harvest operations will open
up new opportunities. Efforts towards contract farming, private market yards, Public-
Private partnership etc. for integration of farmers’ production with domestic and global
markets must be promoted to scale up credit flow. There is need for strengthening link-
ages between production, marketing, post harvest activities. Higher credit support would
also be required for establishing cold chains, pre cooling facility, cold stores, and grading,
sorting and packing facilities, warehouses, Agro Food parks, collection centers, pre-export
treatment of produce. In all the major belts, for fruits, vegetables, or spices, there is a
need for setting up of collection centers and a conveniently located Community Post Har-
vest Handling Centers. Transportation from the farms to these centers through the chain
of collection points, and later for the packed produce to the nearest target markets also
needs to be organized.
For provisioning of basic amenities in the rural periodic haats (around 47,000 in the
country @ Rs.02 million per haat) the total fund requirement is Rs. 9.40 bn. Investment
credit would be required for development of cold storages, pre cooling facilities, other
specialized storages and perishables and bulk silos for food grains. Investment of about
Rs. 122.30 bn is required for development of market infrastructure over the next 5 years.
The approximate total warehousing capacity (covered only) available with CWC, FCI
and SWCs in the country could be pegged at 124.8 million MT (after netting of the hired
covered capacity available with FCI) at the beginning of 2004. An additional 18.0 mil-
lion MT of warehousing capacity is estimated to be available through other public sector
agencies like state Markfeds, civil supplies corporations, agro industries corporation etc.
Thus the total warehousing capacity in India through the public sector is approximately
143.0 million MT. Keeping in view the conservative population estimate of 1.4 billion by
the year 2025 and a minimum per capita caloric requirement, India will need to produce
at least 300.0 million tons of food grains from the current level of around 200.0 million
tons. Taking an estimate of 60 million MT of additional storage to be created, investments
worth Rs. 12 billion would be required.
Schemes like Grameen Bhandaran yojna /assured capacity utilization of private stor-
age facilities by FCI/SWC have been successful in bringing investments in the rural stor-
age sector. However, for channelising further investments in the sector all such ware-
67
houses would need to be certified for quality. NCDEX is accrediting private warehouses,
which conforms to its set of standards. This would propel enhanced warehouse funding
by banks.
7.4 Provision of Basic Infrastructure
The pace and pattern of agricultural development is largely conditioned by the growth
of infrastructure facilities relating to roads, electricity etc. Public investment will have
a leading role to play, in the form of infrastructure as well as necessary research and
development in farm technologies. According to Dantwala (1987), in Indian agriculture
the price policy plays only a limited role in raising aggregate input. Furthermore as
Binswanger (1989) says, the supply response to price takes time to develop fully, some-
times 10- 20 years and depends on public investment in roads, market, irrigation, infras-
tructure development, education and health. In other words a higher level of irrigation
and other public investment created infrastructure raise the impact of prices on output.
Therefore, expansion of infrastructure in power, transport, communication, storage and
processing sectors are important for targeting higher growth rate in agriculture. Public
investments need to be stepped up in regions which although relatively backward have
a high potential for agricultural growth like North East. There is an emerging need to
step up public investment to implement land reforms and employment prospects of rural
labour.
Roads
About 300,000 Indian habitations have no links to the outside world. Till date, out
of 39,623 km of targeted rural roads only 35 per cent i.e. 10,748 km have been built.
Rural roads, particularly rural feeder roads are considered basic to the whole process
of rural development. Farm-to-market roads promote commercialization of agriculture,

raise productive capacity and increase social mobility. For an effective farming system
where a farmer can make a round trip to a market center, agriculture extension services,
farm production and proper credit investment, feeder roads are crucial.
To date out of 39,623 km of targeted rural roads only 35 per cent i.e. 10748 km
have been built. Farm-to-market roads promote commercialization of agriculture, raise
productive capacity and increase social mobility.
More than 0.2 million villages are unconnected and out of the 67 million habitations
40 percent have no link to the outside world. GoI is committed to providing accessibility
68
to the remaining 40 percent of villages. The commitment, if fully realized, would involve
upgrading/ construction of about 1,100,000 km of rural roads at a cost of about Rs 1,100
billion. The current estimated value of the existing rural road network, based on the value
of construction work, is about Rs 2,400 billion. The maintenance of the existing rural
road network requires about Rs 50 billion per annum, out of which only 20-30 percent is
available.
It is estimated by an independent study65 that for every Rs 1.0 million invested in rural
roads, 165 people would be lifted out of poverty. Many villages still rely on earth tracks
that are unsuitable for motorized traffic due to poor riding quality, and which become
practically impassable during the rainy season because of missing bridges and culverts
Much of the network is under-developed, of low standard and poor quality, structurally
weak, poorly maintained, and extremely deteriorated. The lack of roads means that an
estimated 20-30 percent of the agricultural, horticultural and forest produce gets wasted
because of inability to transport the produce to marketing and processing centers. Fi-
nancing rural roads through Diesel cess has been one of the good initiatives however is
constrained by the pace of availability of funds for accelerated development
Rural Electrification
Presently, around 63 percent of the rural households in the country remain un-
electrified. The estimated cost of connecting the remote villages alone by power is placed
at around Rs 37 billion. An enabling provision has been made in the Electricity Bill 2001
permitting stand-alone systems (including those based on renewable sources of energy
and other non-conventional sources of energy) for management of distribution of power
in rural areas through Panchayati Raj institutions, users’ associations, co-operatives and
non-governmental organisations. India has a large potential for renewable energy (RE),
an estimated aggregate of over 100,000 MW. In addition, the scope for generating power
and thermal applications using solar energy is huge. This provides ample opportunities
to entrepreneurs, business associations at village level
Others
In India there is an under investment in public agricultural R&D. the R&D spending
accounted for merely 0.5 percent of agricultural GDP in the 1990s, compared to 1.5 per-
cent for all developing countries and 3 percent in the United States. Public agricultural
research needs to focus more on addressing the problems of poor farmers and regions, as
65 Kumar, Ashok, Zhi Liu, Piers Vickers (2002)
69
larger farms and better off regions are likely to attract private investments. Public agricul-
tural R&D should focus on development and dissemination of technologies and natural
resource management practices that are environmentally sound. R&D - Tissue culture
labs, biotech based research for agriculture development would require an investment of
Rs. 15.00 bn per annum.
Provision of telecommunication facilities to all habitations in the country enabling

reliable voice and data transfer for applications such as telemedicine and banking along
with other internet based applications need to be made. Investment is necessary in mobile
telephony as well to enable use of hand held devices.66
66 Singh, Harsha Vardhana (2005)
70
8 Enabling Mechanisms for enhancing Investment Credit
Flow
Governments should create a policy, legal and regulatory framework that enables efficient
play of market forces in the agriculture sector. The role of government must evolve such
that it restricts itself from distorting the economic and market forces in the agricultural
sector and plays a facilitator/enabler role.
8.1 Promotion of PPP
The quantum and scale of investment required for propelling India into a high growth
rate trajectory in agriculture demands increased public and private participation.67 Gov-
ernment budgets alone would be insufficient to finance directly necessary and desired
facilities. It is therefore essential to create mechanisms that attract private funds for in-
vestment in public works or services.68 The successful experience of utilizing PPP frame-
work for the NHDP program can be replicated for provision of common infrastructure
facilities in rural sector. Annuity based models, grant of work on least subsidy bidding
etc must be explored for constructing / operations & maintenance of rural infrastructure
projects such as irrigation projects, setting up transmission and distribution lines in ru-
ral areas, setting up R&D units, herbal parks etc. This is likely to result into substantial
savings, efficiency and higher service quality in the public services. Lower upfront pay-
ment by government can also enable better allocation of public sector funds and value
for public sector money. There is need to enhance the tax base in the agriculture domain
especially the richer farmers to increase the availability of public funds.
8.2 Enabling Provisions for Attracting Private Investment/Industry
Farm produce sourcing laws: The present laws, with restrictions on direct procurement
from farmers and lack of clarity on contract farming, result in increased raw material
procurement costs. To facilitate more efficient markets, the following changes could be
considered:
• Permission to purchase outside mandis. Amendments required in the APMC Act as

67 PSP: Private Sector Participation, PPP: Public Private Partnership
68 Refer:UN/ECE Forum on Public-Private Partnerships for Infrastructure; Note on Draft Guidelines for Private
Public Partnerships For Infrastructure Development.
71
implemented by states of UP and MP could be extended to other states.
• Single mandi license to operate in all the mandis in a state and permission to buy
all commodities under one license
• Rationalization of food laws and food processing taxes
• Institutionalizing price reforms by increasing user charges on irrigation and electric-

ity
8.3 Desired Regulatory Changes in Banking Sector
The credit flow for driving investment in the agriculture sector can be enhanced by certain
desirable regulatory changes a few of which are discussed below:
Definitional issues in priority sector
Categorization with regards to direct and indirect priority sector lending could be re-
visited to enhance investment credit flow to agriculture.
Removal of direct and indirect agriculture sub-targets
An analysis of the credit statistics for the last several years reveal that the direct
agriculture sub-target (13.5 percent of Net Banking Credit (NBC)) has been more often
underachieved while the indirect agriculture sub-target (4.5 percent of NBC) has been
more often overachieved.
As agriculture has developed over the years, improved cultivation practices, market
developments, international trade have made it necessary to have better infrastructure
and stronger linkages in the agricultural value chain, thereby increasing the credit needs
of the indirect agriculture segment. On the other hand, growth in agricultural produc-
tion has not kept pace with growth in NBC resulting in correspondingly lesser growth
in demand for direct agriculture advances. This imbalance in priority credit allocation
between direct and indirect agriculture is affecting agricultural development.
Current distribution of sub-targets under agricultural lending has favoured agricul-
tural production while development of post-harvest infrastructure has not kept pace with
the increased agriculture productivity. In the light of progressive globalisation of agricul-
tural trade, value addition and reduction of losses in agricultural produce have become
important and they ought to receive more support from directed credit program.
72
Food and agro-based processing industry

In view of the fact that any investment in food and agro-based processing industry
would directly benefit the farmers in realization of better value for their produce, support
in the form of lending, venture funding and equity contribution to food and agro-based
processing sector (including primary value addition facilities for agricultural produce)
should be considered for qualification under direct agriculture sub-target of priority sec-
tor lending obligation.
The present policy favours unviable units, which lack advantages of scale, and thereby
inhibits the global competitiveness of the sector. Therefore it is suggested that the restric-
tions as to the size of investment may be removed and such investments be treated as
direct agricultural lending.
Infrastructure
Qualifying rural infrastructural finance as ’direct agriculture’ such as rural roads,
post harvest infrastructure development, rural telecommunication, irrigation projects,
power, etc is necessary since infrastructure is the backbone of a vibrant rural economy.
Development of basic infrastructure is the key for increased efficiency and enhanced
productivity under agriculture. The development of Kibbutz and other communities in
Israel stand as a good example of how infrastructure precedes overall development.

Warehouse receipt based finance
Under the current guidelines, loan against pledge/hypothecation of agricultural pro-
duce (including warehouse receipt) can be classified as agricultural lending only if the
same bank also extended crop production loan. Warehouse receipt-based financing needs
to be de-linked from crop loans as different banks may have different capabilities in ad-
vancing credit for various purposes.
In addition, advances up to Rs. 0.5 million to farmers against pledge/hypothecation
of agricultural produce (including warehouse receipts) is treated as agricultural lending.
However, considering the high costs of warehousing, administration of loan and collat-
eral management, for small sized loans, this cap needs to be removed. This will allow
farmer association/groups and co-operatives to jointly pledge agricultural produce and
avail warehouse receipt finance.
73
8.4 Restrictive Lending Environment for Private Sector Banks
Certain Acts/regulations prescribe that State-owned agencies and co-operatives need to

bank only with public banks. In particular, Co-operative and Warehousing Acts prohibit
co-operatives and Central and State Warehousing Corporations from banking with private
sector banks.
8.5 Enabling greater access to financial services
Agent Banking
Points of transaction that operate on a ‘shared services’ model combining financial69
and non-financial services distribution, make viability achievable at a reasonable cost to
the consumer. Current RBI regulations forbid the disbursal of cash at non-bank / non-
ATM locations. While this regulation may have been put in place with a view to prevent
money laundering, it in effect hinders the efficient flow of money from such cash surplus
locations. Existence of cash surplus points such as petrol pumps and Octroi/Toll nakas
which are wide spread and located in the close vicinity of rural and low value segments
could provide a suitable cash dispensing alternative. These points currently struggle
with the issue of handling, managing and transporting large quantities of cash to banks
usually situated at urban localities. Enabling cash disbursal from these points would,
therefore, be a win-win scenario for all involved.

Unified Credit ID
To trace the credit histories of rural borrowers the Government can facilitate devel-
opment of Unified Credit ID. This will be a necessary pre-requisite for the establishment
of a credit bureau. Computerized land records and online mortgages: Lack of clear title
of land records and consequent delays in establishing title not only slows down the loan
disbursement but also increases the cost. If computerization of land records as achieved
by the Southern States is implemented by other states, it will facilitate online creation of
mortgages.
Rural Credit Bureau
Credit information tracking and sharing enables lenders to provide incentives to those
with good credit history and provides a strong deterrent to willful default. This will
also facilitate transition to individual lending programmes from group lending over time.
NABARD may play an important role in catalyzing this initiative. Other developing economies
69 Source: Internal note by ICICI Bank on Building a Sustainable Rural Business Model.
74
are also investing in such institutions. The National Loans Register in South Africa is one
such example. The bureau has been formed as a unique collaboration between the pub-
lic and the private sector.70 It provides negative feedback on default behaviour of clients.
The Philippine National Bank, Bangko Sentral Pilipinas (BSP) of Philippines is in its final
stages of setting up a similar credit bureau for financial institutions catering to the needs
of the unorganized sector.71
8.6 Other Suggestions
RIDF fund utilization

A strategic options study could be done in all the states for preparing master plan
for rural road network and funds under RIDF could be made available to finance only
the identified projects. RIDF could also finance one time cost of such study, which must
be done by experienced private consultants. The study could prioritize creation of such
a network on the basis of is desirability, social benefits, economic value etc. Similar
approach could be adopted for creation of other facilities such as value addition centers,
cool chain facility. This would enable utilization of funds and creation of infrastructure
in a systematic manner rather than in an ad hoc manner or under any influence from the
vested forces.
Implementation of schemes/Programs
As far as possible the implementation of government led schemes and programs must
be done with the participation of locals/NGOs /private entities. Government must put
in place adequate safeguards and quality standards, and then outsource/ co-opt to the
private entities the implementation of the programs. This would ensure quality work,
timely completion of projects (saving cost overruns) and also higher utilization of funds (as
against several instances of lapse of funds or ad-hoc utilization of funds towards the end
of the year). But the payments to the private entities / outsourcing entities must be linked
with the financial institutions and commercial banks and not directly by government
agencies as often there are delays in release of funds which disrupts project work. There
must be complete transparency in the release of funds and system of automatic release to
70 Micro Finance Regulatory Council of South Africa was set up on June 1, 1999 and was identified as the
official and single regulator of all money lending transactions falling within the scope of the Usury Act Exemption
Notice www.mfrc.co.za/detail.php?s=340
71 Lirio, Ricardo P. Managing Director SEII, Supervision and Examination Sector, Bangko Sentral ng Pilip-
inas in the National Conference on “Regulation of Microfinance in India” New Delhi, India 19 Ű 20 January,
Organized by Sa-Dhan, 20
75
banks could also be initiated after a period of time in case the participating bank and an
independent agency certify milestone completion of work. Performance security could be
set aside for adjustment of any lapses / dispute over cost etc. at later stage. The idea is
to avoid bureaucratic hassles and ensure timely and quality implementation of projects.
76
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[40] http://www.nrm.or.id
[41] http://www.affa.gov.au
[42] http://www.mfrc.co.za/detail.php?s=340
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Institute for Financial Management and Research

Centre for Development Finance

Enhancing Investment Credit in Agriculture

2 Current status of Agriculture: Economy and Investment 17

2.3 Need for enhancing Investment in Agriculture . . . . . . . . . . . . . . . . . . 19

3 Future trajectory in Agriculture 27

4 Recent Innovations in Rural Arena 34

4.6 Unlocking Values through Integration. e.g., Poultry . . . . . . . . . . . . . . 41

4.13 Contract Farming and Credit Bundling . . . . . . . . . . . . . . . . . . . . . . 46

5 Benchmarking with International Experiences 48

5.13 Saving the Forest with a Timber Lease in Guyana . . . . . . . . . . . . . . . 56

6 Scope of Scaling and Barriers to Scale 63

7 Focus areas for enhanced investments 64

7.3 Post Harvest including warehousing and cold storage . . . . . . . . . . . . . 66

8 Enabling Mechanisms for enhancing Investment Credit Flow 71

8.5 Enabling greater access to financial services . . . . . . . . . . . . . . . . . . . 74

this, it is important to revitalize the agricultural sector, which necessitates investment

1.1 Agricultural Credit

A large number of agencies, including cooperatives, regional rural banks, commercial

Credit Flow for Agriculture and Allied Activities2

Agency 1999-00 2000-1 2001-2* 2002-3* 2003-4 2004-05 (P)

Co-operative Banks 182.60 207.18 235.24 236.36 271.83 356.78

Regional Rural 31.72 42.20 48.54 60.70 69.81 91.62

Commercial Banks 247.33 278.07 335.87 397.74 457.43 600.38

Other Agencies 1.03 0.82 0.80 0.80 0.92 1.20

Total 462.68 528.27 620.45 695.60 800.00 1005.00

Ratio of agricultural credit to agricultural GDP and Total Credit3

Period Agricultural credit as a ratio Agricultural credit as a ratio

1970s 5.4 20.5

1980s 8.3 20.1

1990s 7.4 14.4

2001-02 8.7 10.5

1.2 Comparison of Rural V/S Urban Credit Deposit (CD) Ratio

Banking Profile at metro /urban/semi urban /rural/ RRBs5

No of bank Deposits Credit (Rs. Credit / de-

All India 66,436 12,786.67 7,592.10 59.3

Metro Centers 8,664 5,718.52 4,744.61 83.0

Top 100 centers inclu- 15,066 7,802.91 5,759.46 74.3

Urban centers inclusive 19,379 8,618.75 5,997.51 69.5

Semi-urban centers 14,813 2,405.23 846.83 35.0

Rural centers 32,244 1,762.68 747.75 42.0

Regional rural banks 14,462 497.78 220.68 44.0

Combined CD ratio of banks at semi-urban and rural centers 38

1.3 Institutional Credit Trends

Outstanding credit to agriculture6

March 1994 March 2003 Annual com-

Public sector banks

Net bank credit 1409.14 4778.99 14.53

Total agriculture advances 212.04 735.07 14.81

Direct agriculture advances 192.56 517.99 11.62

Indirect agriculture advances 19.49 217.08 30.71

Private sector banks

Net bank credit 95.45 717.61 25.13

Total agriculture advances 5.91 118.73 39.57

Direct agriculture advances 5.15 52.01 29.30

Indirect agriculture advances 0.76 66.71 64.41

The share of agriculture lending in scheduled commercial banks’ total outstanding

6 Source - RPCD, RBI

Banks achieving Agriculture lending targets7

As on the last re- Public sector banks Private sector banks

The contribution in the corpus of Rural Infrastructure Development Fund (RIDF) of

1.4 Short Term versus Investment Credit