Economy

Think tank report hints at diversion of cheap farm loans

Pointing to a possible diversion of subsidised funds meant for farmers to non-agricultural uses, a >research paper by the Indian Council for Research on International Economic Relations (ICRIER) has found that the crop loans extended in India are in fact close to exceeding the total expenditure on farm sector inputs.

In 2012-13, the aggregate short-term credit — provided primarily to finance the purchase of inputs — was as much as 99.97 per cent of the input cost, including compensation for hired labour. During the 1970s, 1980s and even till the 1990s, the aggregate short-term credit as a proportion of input costs in agriculture was in the range of 13-20 per cent.

“By itself, it does not look credible that the short-term credit market has reached a saturation point in the country… [it] casts further doubt on how much short-term credit is actually being absorbed in farm operations,” the paper by ICRIER Chair Professor Anwarul Hoda and Research Assistant Prerna Terway says.

A possible explanation for the apparent anomaly, it argues, could be diversion of funds resulting from the arbitrage opportunity created by the huge subsidy of 5 percentage points on short-term agricultural credit but adds that more research is needed to get at the truth.

Share of private moneylenders in total farm credit has shot up

In evidence of diversion of cheap farm credit, a research paper, which includes a cost-benefit analysis of subsidies for agricultural credit by ICRIER Chair Professor Anwarul Hoda and Research Assistant Prerna Terway, has also found that a substantial proportion of the credit disbursements year after year are made after the end of Rabi sowing (that is, during the months of January to March).

Though data shows that institutional credit is close to 100 per cent of the total short term farm input costs, the other striking finding of the paper includes the sharp rise in the lending by private moneylenders.

Despite the big push to banks for lending more to the farm sector, the share of private moneylenders in total farm credit has shot up from 26.8 per cent in 2002 to 29.6 per cent in 2013. In fact, at 17.5 per cent, the share of private moneylenders was lower in 1991.

Non-bank credit

The significant growth in institutional credit in India since 1951, the paper finds, has not resulted in a commensurate reduction in the dependence of farmers on non-institutional sources for loans which, in 2013, accounted for as much as 36 per cent of total agricultural credit.

There was a steep fall in the share of non-institutional sources in the total outstanding agricultural credit from 89.8 per cent in 1951 to 33.7 per cent in 1991. However, the share climbed back to 38.9 per cent in 2002. In 2013, at 36 per cent, it was still above the 1991 level.

Direct institutional credit as a proportion of the agricultural GDP, however, rose from 5.33 per cent in 1975-76 to 30.28 per cent in 2011-12.

Credit from non-institutional sources is rising despite the rates of interest from the institutional ones being much lower. According to the latest All India Debt and Investment Survey (AIDIS) of the NSSO, in 2013, only a tenth of the institutional sources’ outstanding debt was at interest rates above 15 per cent. For non-institutional sources this was 71 per cent. Only one per cent of the institutional sources’ debt was outstanding at rates above 30 per cent. But for non-institutional sources this was more than 34 per cent. “The non-institutional agencies seem to be flourishing even though they charge exorbitant interest rates,” the paper says.


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Printable version | Jun 9, 2021 1:32:01 PM | https://www.thehindu.com/business/Economy/think-tank-report-hints-at-diversion-of-cheap-farm-loans/article7343483.ece

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