Increasing the availability of formal finance for agriculture is an important priority for India’s policymakers.

According to the Reserve Bank of India’s (RBI) priority sector lending guidelines, 13.5% of a scheduled commercial bank’s credit portfolio is to be lent for “direct agriculture", i.e., as direct credit to farmers.

Graphics: Paras Jain / Mint

Banks face a penalty if they are unable to meet this requirement; they are expected to invest the shortfall in low-yield bonds issued by the National Bank for Agriculture and Rural Development (Nabard). Banks have consistently failed to achieve this target. As of March 2007, only 11 banks, which included seven out of 28 public sector banks and four out of 26 private sector banks, achieved their direct agriculture lending target. To their credit, banks have deployed substantial resources in an effort to achieve these targets. But more is needed.

One area where banks have fallen short is tapping the opportunity for agricultural credit loans to marginal farmers and landless labourers. Marginal farmers account for 60% of the total farmers in the country. Currently, only one-eighth of marginal farmer households access credit from formal sources.

Agricultural labourers also form a large part of the Indian farming community. The population of agricultural labourers is growing at 3.6% per year, in contrast to the 1.4% annual growth in the population of farmers. In 2001, there were 127 million farmers and 107 million agricultural labourers. In Andhra Pradesh, Tamil Nadu, Kerala, West Bengal, Orissa and Bihar, the number of agricultural labourers exceeded the number of farmers.

The National Sample Survey Organisation’s (NSSO) 59th Round Survey of Farmers in 2003 shows that labour-intensive farming is still an Indian reality. Around 12% of farmer households use only human labour for ploughing activities, implying that in at least 11 million households, farmers are replacing bullocks and tractors for ploughing. Overall, for at least 58% of farms in India, human labour plays a critical role for ploughing. Harvesting is the most labour-intensive activity within farming, with 91% of farmer households using human labour for harvesting. Among the large farmer households with landholding of at least 10ha, 78% depend solely on human labour for harvesting. In other words, even commercially viable farms use human labour as the principal source for harvesting. In threshing, 39% of farmer households with landholding of 10ha or more use only human labour. The estimated labour days per net sown hectare increased from 290 days in 1983 to 345 days in 1993-94 and further to 361 days in 1999-2000.

Increasing the productivity of farmers and agricultural labourers through more nutrients is important to improve agricultural productivity. Data indicates, however, that the cash flows available to these segments, especially at the time when their labour is required, are minimal. NSSO surveys on income and expenditure reveal that for farmers with landholding of up to 2ha, there is a net dissaving (they are spending more than they earn) to the extent of Rs600-800 per month, leaving one to wonder how this segment makes ends meet. Dissaving is more severe among landless agricultural labourers. The dependence of landless labourers and marginal farmers on irregular wage employment has been a singular reason contributing to this dissaving effect. Marginal farmers and agricultural labourers are unable to save and are forced to borrow even for basic consumption.

However, there exists a paradox in RBI’s priority sector guidelines for direct agriculture that has, in fact, discouraged credit access to marginal farmers and agricultural labourers. If engaged in the activity of farming, one can avail of a “direct agriculture" loan from a bank for purchase of farm inputs, farm equipment, for the upkeep and inputs for animals and machinery, and for payment to hired labour for the hours worked on the farm. While a loan for the upkeep and maintenance of cattle qualifies, a loan that can help improve the long-term well being of the labourer or marginal farmer does not qualify under this category. It is classified as a consumption loan or microcredit, some of which is also a part of priority sector lending, but falls under a sub-category that includes other more lucrative activities, and banks rarely, if ever, have a problem meeting their targets. In fact, a strong, if artificial, distinction is made between consumption loans and production loans, with a clear antipathy towards the former. Institutional credit has been encouraged for the consumption of energy-driven agricultural machinery and feedstock and well-being for cattle (from birth to death). However, the nutritional and well-being requirements of the labourer who is still a significant force in driving agricultural productivity have been excluded. The situation is particularly worse in the case of marginal farmers who use principally “self-supplied labour" and cannot be deemed to be “paying themselves" even “current running costs" and thus their credit requirements are not classified as “direct agriculture".

Given the strong links between labour productivity and nutrition (for example iron deficiency has a direct and measurable impact on work capacity), for reasons of improving their productivity alone, there is a strong case for improving credit flows to marginal farmers and landless labourers. This could be achieved by putting all lending to them under the “direct finance to agriculture" category under the priority sector guidelines. This will ensure easier access to credit as banks would be keen on lending to this segment towards fulfilment of their direct agriculture lending obligations. This would also ensure innovative product designs that are in line with the clients’ (current and potential) income streams, thus meeting their emergency as well as long-term credit needs.

If we are truly serious about increasing the rates of growth in agriculture, which has floundered at a dismal 2% per annum for most of the recent past, we have to unleash productivity in the main input to Indian agriculture — human labour.

Nachiket Mor is president of ICICI Foundation. Comment at