Agribusiness Environment and Policy

Unit 1

1. Introduction

The agricultural sector plays a critical role in the overall economic growth of the Ghanaian economy.
Indeed, agriculture is expected to lead to a significant transformation of the economy through improvements
in the sector’s productivity. The sector is divided into a number of subsectors: crops, cocoa, livestock,
forestry, and fisheries. The crop subsector contributes about 66.2 per cent to the sector, with a large
percentage of its products undergoing some form of processing (MoFA 2010). The major products include
cocoa, cashew, sunflower, oil palm, groundnut, fruits, and vegetables, among others. The most common
item that is processed is maize, followed by other commodities such as nuts and oils, fish, and grains such as
millet, sorghum, and guinea corn.
Food processing is an important activity related to the agricultural sector and is dominated by predominantly
small- and medium-scale firms which operate in the informal sector of Ghana. Indeed, the agro-processing
sector may be classified into two groups: domestic processing and factory processing (Quartey and Darkwah
2015). Domestic processing activities are dominated by female workers who are predominantly illiterate and
have no formal training. Skills in food processing are acquired mostly through apprenticeship and a large
amount of family labour is employed. This domestic processing often leads to processed outputs of variable
quality. Nonetheless, these small-scale units are able to create employment opportunities and make use of
local resources. Factory processing activities, on the other hand, are mostly foreign-owned (e.g. Nestle and
Cadbury) or state-owned (e.g. Fan Milk). These factories can process large quantities of raw materials and
can contribute significantly to the economy through export activities.
Agro-processing is important for a number of reasons, chief of which is a reduction in post-harvest losses.
Post-harvest losses in maize, cassava, rice, and yam amounted to about 35 per cent, 3406 per cent, 6.9 per
cent and 24.4 per cent per cent in 2007 (MoFA, 2007) as a result of, among others, ineffective food-
processing technologies. According to the Ministry of Food and Agriculture (2012), only 5 per cent of food
products harvested in Ghana are processed. Therefore, from a health and nutrition perspective, agro-
processing has the potential to increase nutritional value and also increase food security, through a reduction
in food spoilage and wastage. Processed foods also enjoy greater price stability on the world market and
may therefore increase market opportunities for exports, contributing to income securities particularly in
rural communities, which are mostly engaged in farming. The development of the agro-processing industry
may also promote employment generation, contribute to enterprise development, diversification of rural
economies, import substitution, among others. According to Quartey and Darkwah (2015), agro-processing
is the most important sub-sector of the manufacturing sector, with food and beverages representing the
largest component of processed commodities.
There are a lot of opportunities to add value to agricultural commodities—export of processed horticultural
products (i.e. fruit and beverages), for instance, has become increasingly significant in the Ghanaian
economy, particularly given the presence of a knowledgeable private sector. Indeed, export of produce from
the agro-processing sector in Ghana is dominated by horticultural products (fruit and beverages), in addition
to vegetables, roots and tubers, and palm oil. Pineapples, bananas, mangoes, and flowers were among the top
non-traditional export commodities in Ghana in 2012. Notable horticultural processing firms include Blue
Skies (processes pineapples and other fruits into juice for local and international markets); Pinora (processes
pineapples and oranges into frozen concentrates for export); see, among others Owoo and Lambon-Quayefio
(2017: Figure 1).
Presently, the agro-processing industry in Ghana is not well-advanced and there is a relatively low degree of
value-addition to agricultural commodities, and few linkages with marketing and financial services, partly
due to the small firm sizes and under-developed processes which lead to many of these firms operating
below-capacity using inefficient technologies. According to Afful-Koomson et al. (2014), 85 per cent of all
agro-processing firms in Ghana are micro-enterprises, 7 per cent are very small firms, 5 per cent are small
firms and only 3 per cent are medium agro-processing firms. An implication of the limited scale of
production of agro-processing firms in the country is that they are faced with greater bureaucratic, legal, and
administrative challenges, compared to larger firms. Typically, policy directives and initiatives are less
tailored to the needs of SMEs within the country and therefore these firms are more often faced with
overbearing regulations, delays, etc.

Role of Agriculture in the Indian Economy

The role of the agricultural sector in the Indian Economy is:

1. Contribution in GDP
Since the time of Independence, the agriculture sector has been the major contributor to the
country’s GDP. In the financial year 1950-1951, agriculture and other related activities had a share
of 59% of the country’s total GDP in that financial year. Although there is a constant drop in the
agriculture sector, it is still one of the most crucial sectors in the Indian Economy. On the other
hand, in developed countries such as the UK and USA, the agriculture sector contributes only
about 3% of the country’s total GDP.

2. Largest Employee Sector

In India, the agriculture sector has more than half of the total population of the country engaged,
which makes it the sector with the most number of employees in the country. Comparing it with the
developed nations, India has about 54.6% of the total population in the agriculture sector engaged,
while in developed nations such as the UK, USA, France, and Australia, only 2%-6% of its total
population is engaged in the agriculture sector.

3. Source of Food
India is the second-most populous country in the world. And to feed such a huge population, there
is always a constant need for a supply of food. Therefore, there is a need for agriculture and a
need for less dependency on the agriculture sector for the Economy.

4. Relation between Agricultural and Industrial sector

For the continuous manufacturing of products, there is a constant need for raw materials, and to
fulfil this need, most of the industries in the country collect this raw material directly from the
agricultural fields.

In India, around half of the income generated in the industrial sector comes from agricultural-based
industries. Therefore, in India, the industrial sector is highly dependent on the agricultural sector.

5. Commercial Significance
Indian Agriculture is important for the industrial sector and trading purposes both internally and
externally. Agro-products such as tea, coffee, sugar, cashew nuts, spices, etc., which are edible
and textile products such as jute, cotton, and others contribute 50% and 20% respectively to the
total export of the total country. These add up to around 70% of the country’s total export and help
the country in earning foreign exchange.

6. Contribution to the Government’s Revenue

Agriculture is the most significant source of income for the central and state governments. The
government of the country has substantial revenue from rising land revenue. Also, the movement
of agricultural goods helps generate revenue for the Indian railways, which helps the government
in revenue generation.

7. Economic Planning and Agriculture

India’s planning prospects are also heavily reliant on the agriculture sector. A good harvest always
offers momentum to the country’s projected economic growth by improving the business climate
for the transportation system, manufacturing sectors, internal commerce, and so on.

A successful harvest also means that the government will have enough money to cover its
budgeted expenditures. Similarly, a bad harvest causes a total depression in the country’s
business, which eventually leads to a collapse of economic planning. Thus, in a country like India,
the agricultural sector plays a critical role, and the Indian economy’s prosperity is still heavily
reliant on it. As a result of the above study, it is clear that agricultural growth is a necessary
precondition for sectoral diversity and economic development.
Problems Faced by Indian Agriculture

1. Inequality in Land Distribution:

The distribution of agricultural land in India has not been fairly distributed. Rather there is a

considerable degree of concentration of land holding among the rich landlords, farmers and money

lenders throughout the country. But the vast majority of small farmers own a very small and

uneconomic size of holdings, resulting to higher cost per units. Moreover, a huge number of

landless cultivators has been cultivating on the land owned by the absentee landlords, leading to

lack of incentives on the part of these cultivators.

2. Land Tenure System:

The land tenure system practiced in India is suffering from lot of defects. Insecurity of tenancy was

a big problem for the tenants, particularly during the pre- independence period. Although the land

tenure system has been improving during the post-independence period after the introduction of

various land reforms measures but the problem of insecurity of tenancy and eviction still prevails

to some extent due to the presence of absentee landlords and benami transfer of land in various

states of the country.

3. Sub-division and Fragmentation of holdings:

In India, the average size of holding is expected to decline from 1.5 hectares in 1990-91 to 1.3

hectares in 2000-01. Thus the size of agricultural holding is quite uneconomic, small and

fragmented. There is continuous sub-division and fragmentation of agricultural land due to

increasing pressure of population and breakdown of the joint family system and also due to forced

selling of land for meeting debt repayment obligations. Thus the size of operational holdings has

been declining year by year leading to increase in the number of marginal and small holdings and

fall in the number of medium and large holdings.

4. Cropping Pattern:

The cropping pattern which shows the proportion of the area under different crops at a definite

point of time is an important indicator of development and diversification of the sector. Food crops

and non-food or cash crops arc the two types of crops produced by the agricultural sector of the

country.
As the prices of the cash crops are becoming more and more attractive therefore, more and more

land have been diverted from the production of food crops into cash or commercial crops. This has

been creating the problem of food crisis in the country. Thus after 50 years planning the country

has failed to evolve a balanced cropping pattern leading to faulty agricultural planning and its poor

implementation.

5. Instability and Fluctuations:

Indian agriculture is continuously subjected to instability arising out of fluctuations in weather and

gamble of monsoon. As a result, the production of food-grains and other crops fluctuates widely

leading to continuous fluctuation of prices of agricultural crops. This has created the element of

instability in the agricultural operation of the country.

6. Conditions of Agricultural Labourers:

Agricultural labourers are the most exploited unorganized class in the rural population of the

country. From the very beginning landlords and Zamindars exploited these labourers for their

benefit and converted some of them as slaves or bonded labourers and forced to continue the

system generation after generation. All these led to wretched condition and total deprivation of the

rural masses.

After 50 years of independence, the situation has improved marginally. But as they remain

unorganized, thus economic exploitation of these workers continues. The level of income, the

standard of living and the rate of wages remained abnormally low.

Total number of agricultural workers has increased from 55.4 million in 1981 to 74.6 million in

1991 which constituted nearly 23.5 per cent of the total working population of the country. This

increasing number has been creating the problem of surplus labour or disguised unemployment,

which in turn is pushing (heir wage rates below the subsistence level.

7. Poor Farming Techniques and Agricultural Practices:

The farmers in India have been adopting orthodox and inefficient method and technique of

cultivation. It is only in recent years that the Indian farmers have started to adopt improved

implements like steel ploughs, seed drills, barrows, hoes etc. to a limited extent only. Most of the
farmers were relying on centuries old. Wooden plough and other implements. Such adoption of

traditional methods is responsible for low agricultural productivity in the country.

8. Inadequate Use of Inputs:

Indian agriculture is suffering from inadequate use of inputs like fertilizers and HYV seeds. Indian

farmers are not applying sufficient quantity of fertilizers on their lands and even the application of

farm yard dung manure is also inadequate. Indian farmers are still applying seeds of indifferent

quality. They have no sufficient financial ability to purchase good quality high yielding seeds.

Moreover, the supply of HYV seeds is also minimum in the country.

9. Inadequate Irrigation Facilities:

Indian agriculture is still suffering from lack of assumed and controlled water supply through

artificial irrigation facilities. Thus the Indian farmers have to depend much upon rainfall which is

neither regular nor even. Whatever irrigation potential that has been developed in our country, a

very limited number of our farmers can avail the facilities.

In spite of vigorous programme of major and minor irrigation projects undertaken since 1951, the

proportion of irrigated land to total cropped area now comes to about 53 per cent in 1998-99.

Therefore, in the absence of assured and controlled water supply, the agricultural productivity in

India is bound to be low.

10. Absence of Crop Rotation:

Proper rotation of crops is very much essential for successful agricultural operations as it helps to

regain the fertility of the soil. Continuous production of cereals on the same plot of land reduces

the fertility of the soil which may be restored if other crops like pulses, vegetables etc. are grown

there. As the farmers are mostly illiterate, they are not very much conscious about the benefit of

crop rotation. Therefore, land loses its fertility to a considerable extent.

11. Lack of Organized Agricultural Marketing:

Indian farmers are facing the problem of low income from their marketable surplus crops in the

absence of proper organized markets and adequate transportation facilities. Scattered and sub-

divided holdings are also creating serious problem for marketing their products.
Agricultural marketing in India is also facing the problem of marketing farmers’ produce in the

absence of adequate transportation and communication facilities, Therefore, they fell into the

clutches of middlemen for the speedy disposal of their crops at an uneconomic and cheaper price.

12. Instability in Agricultural Prices:

Fluctuation in the prices of agricultural products poses a big threat to Indian agriculture. For the

interest of the farmers, the Government should announce the policy of agricultural price support

so as to contain a reasonable income from agricultural practices along with providing incentives

for its expansion. Stabilization of prices is not only important for the growers but also for the

consumers, exporters, agro-based industries etc.

In India, the movements of prices of agricultural products are neither smooth nor uniform, leading

a fluctuating trend. In the absence of proper price support and marketing support, prices of

agricultural products has to go down beyond the reasonable limit so as to create a havoc on the

financial conditions of the farmers.

Again the exorbitant prices charged by the middlemen on agricultural crops also pose a serious

threat to the consumers. Thus price, fluctuation may lead to disaster as both falling and rising

prices of agricultural crops are having its harmful impact on the society as well as on the economy

of the country.

13. Agricultural Indebtedness:

One of the greatest problems of Indian agriculture is its growing indebtedness. The rural people

are borrowing a heavy amount of loan regularly for meeting their requirements needed for

production, consumption and also for meeting their social commitments. Thus the debt passes

from generation to generation. Indian farmers fall into the debt trap as a result of crop failure,

poor income arising out of low prices of crops, exorbitantly high rate of interest charged by the

moneylenders, manipulation and use of loan accounts by the moneylenders and use of loan for

various unproductive social purposes.

Although they borrow every year but they are not in a position to repay their loans regularly as

because either loans are larger or their agricultural production is not sufficient enough to repay

their past debt. Thus the debt of farmers gradually increases leading to the problem of rural
indebtedness in our country. Thus it is quite correct to observe that “Indian farmer is born in debt,

lives in debt and dies in debt.”

Agro Based Industries in India

Agro-Based industries in general are those industries that have direct or indirect links with agriculture. It
covers a variety of industrial, manufacturing and processing activities based on agricultural raw materials as
well as activities and services that go as inputs to agriculture.
The Famine Enquiry Commission,1944 defined Agro-based industries as “those, which are involved in
supplying the farm with agricultural inputs besides handling the farm products.”
In this article, we shall be discussing various aspects of Agro-Based industries in India, issues surrounding
the sector. Further, this article covers other important dimensions, keeping in mind the demands of the
preliminary as well as main examination of the UPSC IAS Exam.
Why is it in News?
Recently the honourable Vice President M. Venkaiah Naidu, in one of his addresses, has emphasized the
need to promote agro-based industries in rural areas so as to create employment opportunities for the rural
youth. He further stressed the role of agro-industries in augmenting the income of the farmers with allied
activities.

Why are Agro-Based Industries Needed?

 Helps in the upliftment of the rural economy.

 Proper utilization and achieving the potential of the rural economy sector, where plenty of
raw materials are available.
 Provide rural populations with an opportunity for employment.
 Generate income and thereby improve the economic condition of people – which in turn
creates the potential for demand-based industries.
 Provide an opportunity for the dispersal of industries instead of concentrating at a particular
place.
 Solve the problem of exploitation of the farming community by traders and middlemen.
 Farmers could be assured of better prices for their produce.
 Encourage bringing more and more areas under various crops – increase agricultural
production and improve the nation’s economy.
 The transportation cost of agricultural products can be minimized – thereby helping to
minimize the cost of finished goods.
 Avoid wastage of perishable agricultural products.
 Help to develop backward areas based on their suitability for setting up agro-industries.
 Prevent migration of people from rural to urban areas.
 To encourage balanced growth between agriculture and industry.

What are the Different Constituents of the Agro-Based Industries?

Agro-produce processing units:

 It deals with processing the raw material so that it can be preserved and transported at a
cheaper cost.
 No new product is manufactured. e.g. – Rice mills.
Agro-produce manufacturing units

 Manufacture entirely new products.

 Finished goods will be entirely different from their original raw material.
 Example-Sugar factories, bakery, solvent extraction units, textile mills, etc.
Agro-inputs manufacturing units

 Industrial units which produce goods either for mechanisation of agriculture or for
increasing productivity come under this type.
 Example: Agricultural implements, seed industries, pumpset, fertilizer and pesticide units,
etc.
Agro service centres

 They provide auxiliary and necessary services for the sectors.

 Example- Workshops and service centres that are engaged in repairing and servicing
pump sets, diesel engines, tractors and all types of farm equipment.

What are the Challenges in Establishing Agro-Based Industries?

 Proper guidance is not available to entrepreneurs.

 It involves some element of risk-taking
 Change in crops/cropping pattern
 Change in variety of crop due to technological improvement
 Failure of monsoon may hit the raw material supply.
 The multiplicity of agricultural produce and the absence of suitable methodology to select
the best-suited industries to a given region.
 Seasonal supply of agricultural produce may result in underutilization of capacity of the
units as the unit will not be working throughout the year.
 Industries based on fruits and vegetables may not get the same variety throughout the
year, but they may get some other variety.
 Uncertainty about future market demands.
 Absence of information about quantity and quality of the market.
 Absence of proper integration among the various agencies of development in the district.
 Proper guidance, training for modern and sophisticated agro-industries are not available.
 As modern small industries are capital intensive, the supply of finance will be a
considerable problem.
 Promotional activities such as conducting intensive campaigns, identifying industries and
explaining to entrepreneurs about prospects are inadequate.

Institutional Arrangements for Promotion of Agro-Based Industries

Different Government Departments and Agencies

 Ministry of Agriculture-Deals with rice mills, oil mills, sugar mills, bakeries, cold storage.
 Khadi And Village Industries Board: Covers traditional agro-based industries like “gur‟,
handicrafts, khandsari.
 Agro-Industries Development Corporation- In each state mainly supply agricultural
machinery, inputs and agricultural advisory services to farmers. Some corporations have
also undertaken certain manufacturing activities in the agro-industries sector.
  Small Industry Development Organization- Deals with small agro-industries like hosiery,
processing of food products, beverages, food and fruit preservation, agricultural
implements.

Policy Directives by the Government

Agro Processing Cluster

 The scheme aims at the development of modern infrastructure and common facilities to
encourage groups of entrepreneurs to set up food processing units based on a cluster
approach.
 It seeks to link groups of producers or farmers to the processors and markets through a
well-equipped supply chain with modern infrastructure.
 At least 5 food processing units with a minimum investment of Rs. 25 crores.
 The units are set up simultaneously along with the creation of common infrastructure.
 At least 10 acres of land is required to be arranged either by purchase or on lease for at
least 50 years for setting up an Agro-Processing Cluster.
 Each agro-processing clusters under the scheme have two basic components i.e.
 Basic Enabling Infrastructure, such as roads, water supply, power supply, drainage.
 Core Infrastructure or Common facilities such as warehouses, cold storage, IQF,
tetra pack, sorting, grading.

Agricultural marketing
Everything you need to know about agricultural marketing. Agricultural marketing comprises
marketing of food grain, commercial crops, plantation crops, horticultural produce and semi-
processed products.
Agricultural Marketing is a process which starts with a decision to produce a saleable farm
commodity, and it involves all the aspects of market structure or system, both functional and
institutional, based on technical and economic considerations, and include pre- and post-harvest
operations viz., assembling, grading, storage, transportation and distribution.

According to Thomsen – the study of agricultural marketing comprises all the operations, and the
agencies conducting them, involved in the movement of farm produced foods, raw materials and
their derivatives, such as textiles, from the farms to the final consumers, and the effects of such
operations on farmers, middlemen and consumers.

The important types of agricultural markets in India are as follows:

 Type # 1. Primary or Local Markets:
Primary markets, known as Hatts or Shandies are held once or twice a week in the
neighbourhood of a group of villages. There are more than 22,000 such markets in India. Most of
the agriculturists sell their farm products in these markets. More than 50% of the total marketed
surplus is sold in these markets. These markets are organized by village Panchayats who charge
some rent from shopkeepers for the space occupied. Haggling and bargaining is a common
feature of these markets. The village bania acts as a middleman in these markets.
 Type # 2. Secondary Markets:
These are also known as ‘wholesale’ or ‘assembling’ markets and are called ‘mandis’ or ‘gungs’.
There are about 4145 such markets. These markets are permanent in nature; business in the
markets is transacted regularly throughout the year.
The produce is handled in large quantities and specialized operators become necessary for the
performance of different services. The markets provide facilities of storage, handling and banking
services and are well-served by roads and railways. A number of middlemen operate in these
markets.
 Type # 3. Terminal Markets:
These markets perform the function of carrying goods to consumers, final buyers or to places of
processing. Such markets are to be found in big cities or at ports. The area of their operation
extends over a state.
 Type # 4. Fairs:
Fairs held on religious occasions at pilgrim centres are important sources of marketing of
agricultural produce in India. Such fairs are held annually and are organized by district officers,
local bodies or private agencies. These fairs are very popular in Bihar, W. Bengal, UP, Orissa,
Maharashtra, Gujarat and Rajasthan.
 Type # 5. Regulated Markets:
These have been set up by the Government with the purpose of checking fraudulent practices
which are generally practiced by traders in the primary and secondary markets. In these markets,
the rules and regulations are prescribed by the Government marketing practices.
 Type # 6. Co-Operative Marketing:
These markets function on the basis of principles of cooperation. A cooperative marketing society
carry the agricultural produce direct to the consumers thus eliminating a large army of
middlemen and intermediaries.
 Type # 7. State Trading:
State trading in agricultural produce has become an important element of agricultural marketing
in India. State agencies like, Food Corporation of India, set up their exclusive centres in and
around villages and mandis at harvest time to procure produce from peasants to Government at
fixed prices.

Definition of agricultural Finance ,nature-scope, meaning , -micro &macro finance Meaning:

Meaning:
 Agricultural finance generally means studying, examining and analysing the financial aspects pertaining to
farm business, which is the core sector of India. The financial aspects include money matters relating to
production of agricultural products and their disposal.

Definition of Agricultural finance:

Murray (1953) defined agricultural. finance as “an economic study of borrowing funds by farmers, the
organization and operation of farm lending agencies and of society’s interest in credit for agriculture .”

Tandon and Dhondyal (1962) defined agricultural. finance “as a branch of agricultural economics, which
deals with and financial resources related to individual farm units.”

Nature and Scope:

Agricultural finance studied at both micro and macro level. Microfinance deals with different sources of
raising funds for agriculture as a whole in the economy. It is also concerned with the lending procedure,
rules, regulations, monitoring and controlling of different agricultural credit institutions. Hence macro-
finance is related to financing of agriculture at aggregate level.

Micro-finance refers to financial management of the individual farm business units. And it is concerned
with the study as to how the individual farmer considers various sources of credit,

quantum of credit to be borrowed from each source and how he allocates the same among the alternative
uses with in the farm. It is also concerned with the future use of funds.

Therefore, macro-finance deals with the aspects relating to total credit needs of the agricultural sector,
the terms and conditions under which the credit is available and the method of use of total credit for the
development of agriculture, while micro-finance refers to the financial management of individual farm
business.

Significance of Agricultural Finance:

1) Agril finance assumes vital and significant importance in the agro – socio – economic development of the
country both at macro and micro level.

2) It is playing a catalytic role in strengthening the farm business and augmenting the productivity of scarce
resources. When newly developed potential seeds are combined with purchased inputs like fertilizers &
plant protection chemicals in appropriate / requisite proportions will result in higher productivity.

3) Use of new technological inputs purchased through farm finance helps to increase the agricultural
productivity.

4) Accretion to in farm assets and farm supporting infrastructure provided by large scale financial
investment activities results in increased farm income levels leading to increased standard of living of rural
masses.

5) Farm finance can also reduce the regional economic imbalances and is equally good at reducing the
inter–farm asset and wealth variations.

6) Farm finance is like a lever with both forward and backward linkages to the economic development at
micro and macro level.

7) As Indian agriculture is still traditional and subsistence in nature, agricultural finance is needed to create
the supporting infrastructure for adoption of new technology.

8) Massive investment is needed to carry out major and minor irrigation projects, rural electrification,
installation of fertilizer and pesticide plants, execution of agricultural promotional programmes and
poverty alleviation programmes in the country. Input finance for purchasing farm materials and livestock
funding For those wondering “What is agriculture finance?” one of the aspects of it is input finance. It is
used for purchasing farm materials such as livestock, feed, seeds, and fertiliser. You can also use it to
purchase livestock such as pigs, cattle, sheep or goats. This finance may not cover the costs of large
equipment or machinery but it does allow you to purchase other essential items that help with the smooth
running of your farm. You can also use this finance to purchase other materials or even small equipment
such as compact tractors or farming tools.

Sources of Agricultural Finance In India

Institutional Sources

• Cooperative Credit societies (Primary Agricultural credit societies, Central Co-operative Bank, state Co-
operative Bank)

• Commercial Bank

• Regional Rural Banks (RRB)

• NABARD

Non-Institutional Sources

Money lenders, Traders, Landlords

Co-operative credit societies

This is the cheapest source, these provide short term as well as long term loans.

• Primary Agricultural credit societies at village level

• Central co-operative Bank at District level

• State co-operative Bank at state level

• Commercial Banks

Initially the contribution of commercial bank was very less. After nationalization of banks in 1969,
contribution of banks to agricultural credit increased significantly. It provides Direct & Indirect finance.
Direct finance for purchasing of pump sets, tractors, other agricultural machinery, construction of wells,
tube wells and for other agricultural activities to farmers. Indirect finance is granted to co-operative
societies, FCI, state Govt. and other agencies engaged in procurement, storage and distribution of food
grains. It also provide credit through service units for warehousing, processing , marketing, transporting
etc.

Achievements of Commercial Banks

Share in total rural credit increased from 0.9 % to 74.5%. Helped rural population to free themselves from
the cluches of Money lenders. Helped farmers to use the modern methods of cultivation and improve their
financial position.

Problems:

Huge loss due to branch expansion Cost of service increased with large no. of small borrowings. Problem of
bad debt Lack of coordination between the commercial banks, cooperative banks and RRB.

Regional Rural Banks (RRB)

5 RRBs set up in 1975 for weaker section of rural community. They give direct loans only to small and
marginal farmers, agricultural laborers, rural artisans and small entrepreneurs to develop industry, trade
and other productivity in rural areas. They are sponsored by a commercial bank which contributes to 35%
of their share capital. Area of operation is limited to a specific region and few districts. Lending rates are
low. Refinanced by NABARD.

Achievements of RRBs:

Helped needy poor people by providing loan at lowest cost. No. of RRBs increased from 5 to 196. In 2010-
11 RRBs provided about 10 % of the Institutional credit to agricultural sector.

Problems:

Controlled by many agencies central Govt., state Govt. and commercial banks. leads to delay in decision
making. Recovery position is poor Substantial loss Lack of proper management. Defective lending policy.

NABARD

National Bank for Agriculture and rural development (NABARD) set up in 1982. it is a refinancing agency.
During 2010-11 sanctioned Rs. 35,273 cr.

Functions:

• As an apex institution it has to take care of financial requirement of agriculture and rural development.

• Provide short term, medium term and long term credit to cooperatives, RRBs and commercial banks
which are main sources of institutional credit.

• It gives long term loan up to 20 years to state govt. to enable them to subscribe to the share capital of
cooperative credit societies.

• Direct and supervise the flow of credit to agriculture, a small scale industries, cottage and village
industries, handicrafts and other economic activities in rural areas.

• It maintains a Research and Development Fund to promote research in agriculture and rural
development.

The Rural Infrastructure Development Fund(RIDF) was established in 1995- 96 to finance infrastructure
projects. The RIDF gives loans to state Governments for infrastructure projects such as irrigation, rural
roads, rural bridges, watershed management, flood control, warehouses, cold storages, fisheries, forest
development etc.

NABARD provides 100% refinance assistance to banks at low interest rates for financing self help groups.

It has introduced the Kisan Credit Card scheme in 1998-99 to provide short term credit to farmers. The
scheme is implemented by commercial banks, RRBs and cooperatives. Today KCC has become very popular
among farmers.

NABARD helps the RRBs and the co-operative banks to implement the Swarnajayanti gram Swarozgar
Yojana.

It is responsible for conducting inspection of the cooperatives.

PROBLEMS OF AGRICULTURAL FINANACE:

Problems of Agricultural Credit in India with Suggested Remedies!

Agricultural Credit:

An average Indian farmer, who has to work on an uneconomic holding’, using traditional methods of
cultivation and being exposed to the risks of a poor agricultural season is almost always in debt. He is a
perennial debtor.
Once the farmer falls into debt due to crop failure or low prices of crops or malpractices of moneylenders
he can never come out of it. In fact, large part of the liabilities of farmers is ‘ancestral debt’. Thus, along
with his landed property, he passes on his debt to the next generation.

There are four main causes of rural indebted-ness in India:

(i) low earning power of the bor-rower,

(ii) use of loan for unproductive purposes,

(iii) very high rate of interest charged by the vil-lage moneylender and

(iv) the manipulation of accounts by the lenders.

In a few cases, the bad habits of the farmers (such as gambling, drinking, etc.) are responsible for his
burden of ‘unproductive’ debt. However, in most cases, the cause of the debt may be some expensive
social ceremony which the farmer was perhaps forced to “arrange for fear of a social boycott”.

Need for Finance:

Finance is required by farmers not only for the production and marketing of crops but also to keep a
stagnant agricultural economy alive. Most Indian farmers live near the brink of starvation. A bad monsoon,
a poor harvest, an accident or ill-ness in the family forces him to approach the mon-eylender for a loan. In
India, there is the preponderance of such ‘distress’ or unproductive loans. Agricultural finance in India is
not just one re-quirement of the agricultural business but a symp-tom of the distress prevailing among the
majority of the farmers.

Rural credit includes not only credit provided to farmers but also credit extended to artisans, owners of
small and medium industries in rural areas, small transport operators and so on. Two main sources of rural
credit are private and insti-tutional. The former includes private moneylend-ers, traders and commission
agencies, relatives and- landlords.

The sources of institutional credit are rural co-operatives, commercial banks, particularly the State Bank of
India (SBI). And, with the set-ting up of a specialised institution called the Na-tional Bank for Agricultural
and Rural Develop-ment (NABARD) the Agricultural Refinance and Development Corporation (ARDC) has
ceased to exist. Up to 1982 it was responsible for extending agricultural finance under guidance of the
Reserve Bank of India.

It may also be noted that the short- and medium-term credit requirements of the farmers is met by
indigenous bankers or village moneylenders, cooperative credit societies and commercial banks. Long-term
credit needs are met by land development banks and NABARD. The principal aim of institutional credit is to
replace the widely prevalent money-lending at a very high rate of interest. Available data show that the
rural credit institutions have succeeded to a considerable extent in achieving this aim.