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Photo: Mint

Loan for tenants: small reform, big gain

The experience of states like Andhra Pradesh is encouraging and some other states are already experimenting with empowering tenant farmers

More than half of India’s labour force is still connected directly or indirectly to agriculture for its livelihood. This sector gets one-seventh of the national income. Its income share is shrinking rapidly but its employment share is not. Hence the dual challenge is to increase its income share, and increase the rate of employment absorption into industry and services.

Last year, the Union budget declared the goal of doubling farmers’ incomes in five years. That would require farm output to rise by almost 10% per year, and separately a price increase of about 5% per annum. That is surely an Herculean but worthy goal, and meeting it even halfway would still be a great achievement. As such last year’s budget increased outlay on agriculture by 84% over the previous year.

The responsibility for improving the fortunes of agriculture lies with half-a-dozen ministries at the Centre, not to mention state governments as well. Among policy levers there are so many moving parts that it is difficult to attribute success and failure of policy to a single lever. For instance, the fertilizer subsidy burden is huge, and its reach is uneven across small and big farmers, and across different regions of the country. The subsidy has also led to overuse of urea in states like Punjab, destroying the soil.

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Another example is the way free electricity to farmers has led to over-investment in tubewells, an alarming lowering of the water table, and no significant improvement in irrigation. Large-scale leakage in the public distribution system of foodgrain is well known. The minimum support price regime does not cover all traditional crops, and no longer serves as an insurance mechanism, which is what it was meant to be. Farmer suicides still dominate the discourse in states like Maharashtra, Telangana and Andhra Pradesh. The phenomenon of suicides is connected with farmer indebtedness and volatility in commodity prices such as cotton.

Big gains in poverty reduction are not possible unless the multidimensional problems of agricultural households are addressed. India will perhaps have to forge a new and unique development model. This would mean that unlike in the West or even in China, our aim should not be solely to decrease the number of households that depend on agriculture, but in fact increase the incomes accruing to them. The big weak link is the interface between industry and agriculture, i.e. agro-processing and value addition in the supply chain.

Here we focus on the aspect of credit flow to agriculture. The 70th round of the National Sample Survey on the “Situation of Agricultural Households" shows that 48% of the households do not get any credit. The remaining 52% borrow from banks, cooperatives, landlords, shopkeepers, relatives and friends. Despite decades of effort at extending credit to agriculture, ambitious targets, schemes of financial inclusion, systems of banking correspondents and facilitators, kisan credit cards, why is it that almost half the households have no recourse to credit?

The economic activity in agriculture is peculiar, because it requires upfront investment (in seeds, irrigation, fertilizer, pesticides) and the income is received only after three-four months. Further there is another peculiarity in that if there is a bumper crop, then prices crash, which has an adverse impact on net income to the farming household. There are other attendant risks such as weather, pests and monsoon failure.

One particular aspect needs attention. It is the phenomenon of absentee landlords and tenancy farming. Leasing of farmland is quite common even though completely informal. In most parts of India, the tenant farmer has no legal status, much like the slum-dweller in cities. Hence reliable statistics are difficult to get. In Andhra Pradesh, almost 30% of farming is done by tenants. Data collected a few years ago showed that of 1.7 million tenants, more than one-third are landless and almost half of them have landholdings of their own of less than 0.5 hectares. Such farmers have no access to bank loans, crop insurance, loan waivers or subsidies. In fact, in 2013, of the Rs23,000 crore given away as loan waivers, only 0.1% went to tenant farmers, although their share in farmer suicides is almost 80%.

How then do these farmers access credit? The legalization of tenancy farming is a distant political dream. Thankfully, there is a small reform that can a go a long way in enabling credit flow to tenants. Such an act was, in fact, passed by Andhra Pradesh in 2011. It is called the Land Licensed Cultivators Act, which empowers tenants with annual loan eligibility cards. The name of the tenant is pencilled on the land record (as a tenant), on the basis of which he can avail of a bank or cooperative loan. This reform doesn’t give any property rights on the leased land to the tenant, but just gives him a sound “borrower status".

This need not cause any alarm in the land-owning class. And surely tenants of flats in cities cannot get home loans against the house they are renting. But because agriculture is an entrepreneurial and short-term business cycle activity it needs this innovation.

The experience of states like Andhra Pradesh is encouraging and some other states are already experimenting with this tenancy empowerment. Hence while we wait for tenancy farming to regain legal status, this reform of enabling institutional credit flow to tenants should be enabled by the Central government and be adopted nationwide.

Ajit Ranade is chief economist at Aditya Birla Group (Disclosure: The group has interests in the fertilizer business).

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