agriculture and finance in rural sector

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AGRICULTURE & FINANCE IN

RURAL SECTOR

Indian economy is basically agrarian. Nearly 70% of the Indian

population depends upon agriculture for its livelihood.

AGRICULTURE plays a crucial role in the Indian economy

and is pivotal for ensuring food security, employment generation and

social transformation of the nation. With 67 per cent of our

population and 54 per cent of the total workforce depending on

agriculture and other allied activities, agriculture not only meets the

basic needs of Indias growing population, but its direct linkages

with the industry is on the increase owing to the increased demand

for processed agricultural commodities and goods by consumers.

Agriculture in India is the means of livelihood of

almost two thirds of the work force in the

country. It has always been INDIA'S most

important economic sector. The 1970s saw a

huge increase in India's wheat production that

heralded the Green Revolution in the country. The increase in post

-independence agricultural production has been brought about by

bringing additional area under cultivation, extension of irrigation

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facilities, use of better seeds, better techniques, water management,

and plant protection. Dependence on India agricultural imports in

the early 1960s convinced planners that India's growing population,

as well as concerns about national independence, security, and

political stability, required self-sufficiency in food production. This

perception led to a program of agricultural improvement called the

Green Revolution, to a public distribution system, and to price

supports for farmers. The growth in food-grain production is a result

of concentrated efforts to increase all the Green Revolution inputs

needed for higher yields: better seed, more fertilizer, improved

irrigation, and education of farmers. Although increased irrigation

has helped to lessen year-to-year fluctuations in farm production

resulting from the vagaries of the monsoons, it has not eliminated

those fluctuations. Non-traditional crops of India, such as summer

mung (a variety of lentil, part of the pulse family), soyabeans,

peanuts, and sunflowers, were gradually gaining importance. Steps

have been taken to ensure an increase in the supply of non-chemical

fertilizers at reasonable prices. There are 53 fertilizer quality control

laboratories in the country. Realizing the importance of Indian

agricultural production for economic development, the central

Government of India has played an active role in all aspects of

agricultural development. Planning is centralized, and plan

priorities, policies, and resource allocations are decided at the central

level. Food and price policy also are decided by the central

government. Thus, although agriculture in India is constitutionally

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the responsibility of the states rather than the central government,

the latter plays a key role in formulating policy and providing

financial resources for agriculture. Expansion in crop production,

therefore, has to come almost entirely from increasing yields on

lands already in some kind of agricultural use.

The monsoons, however, play a critical role in Indian

agriculture in determining whether the harvest will be bountiful,

average, or poor in any given year. One of the objectives of

government policy in the early 1990s was to find methods of reducing

this dependence on the monsoons

In India, the Reserve Bank contributes to a great extent in the

economic development in various ways. It assumes special

responsibility in the development of agriculture & industry. The RBI

concentrates more on these two vital sectors of the economy. RBI

does not presently provide these finances directly.

RESERVE BANK OF INDIA & AGRICULTURE FINANCE

Agriculture development is regarded as a prerequisite of

economic development of the country. The Reserve Bank of India

realises the following basic contributions of the Agricultural sector in

the overall economic development.

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Product contribution making available food & raw

materials.

Market contribution providing the market for producer

goods and consumers goods produced in the non-agricultural

sector.

Factor contribution making available labour & capital to

non-agricultural sector, and

Foreign exchange contribution.

Being the largest industry in the country agriculture is the

source of livelihood for over 70% of population in the country. Onrecognising the fact that Agriculture is the foundation on which the

entire super structure of the growth of industrial and other sectors of

the economy has to stand, the RBI develops the Agricultural sector in

the following ways:

Agriculture Credit Department

According to section 54 of the RBI Act, it is required to set

up a separate Agricultural Credit Department. With the formation

of NABARD in 1982, all the activities of this Department have been

transferred to NABARD. However, the Rural Planning and Credit

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Department in the Reserve Bank deals with the following agriculture

related matters.

Funds for Agricultural Development

Financial Assistance to Co-operative Sector

Establishment of agricultural Credit Board

Establishment of NABARD

Credit Functions

A. Short-term Credit

B. Medium-term Credit

A. Long-term Credit

B. Conversion & Rescheduling Facilities

C. Financing Cottage/Village/Small Scale Industries, etc.

Assistance to Co-operative Banks in SFDA and

MFAL

Reform Measures for RRBs

Promotion of Warehouse Facilities

Other Facilities to Agriculture

National Agricultural Insurance Scheme

Rural Credit

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The successive five year plans embarked upon the green

revolution and white revolution for which modernisation and

mechanisation of agriculture and allied activities was a must and

that needed financial support. As one of the measures to develop the

economy and to provide support for nation building, Bank of India

commenced rural lending wayback in 1968 even before the

nationalisation of banks. During the post nationalisation period,

spanning more than 3 decades, the Bank has grown in size and

stature with more than 2592 branches (1723 rural and semi-urban

branches) spread across the length and breadth of the country. The

Bank has been supporting the task of nation building by

implementing varied polices/guidelines of the Government with clear

objectives. As against the benchmark of 40% prescribed by Reserve

Bank of India under Priority Sector to Net Adjusted Credit, the

Banks achievement is consistently over 45% for the last 5 years.

The Bank has achieved business level of Rs. 16,800 crores as on

February 2005, under priority sector. Presently, the Bank has more

than 13.80 lakh borrowal accounts under Priority Sector credit fold

and there are innumerable satisfied borrowers who have come up in

life with our timely financial assistance.

Keeping in view the rich past experience and in tune with the

Government of India/Reserve Bank of India guidelines, the Bank is

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adopting innovative and growth oriented administrative policy

measures.

Focussed attention is given to build a loyal band of customers inRural & Semi-urban areas where the Bank has more than 67% of its

Branch Network. This has enabled development of individuals, a

village or even the given area by increased production and

productivity, through smooth flow of credit.

The Bank has, of late, launched innovative schemes/card

products with defined objectives and refined methodology. The

Philosophy, concepts and various issues behind launch of our

various new card products/schemes are as under :-

i) Intensive financing in service area with package of services to

optimally utilize the resources at the command of the borrowers,

particularly farmers and rural entrepreneurs;

ii) To maintain continued relationship with our existing

borrowers by providing credit packages which take care of both the

present as well as future aspirations of the borrowers in pursuing

their various productive ventures;

iii) Providing credit for the diversified needs of the borrowers

family for farm, off-farm as well as consumption needs like

housing, education, conveyance, marriages, health etc;

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iv) Recognising our good borrowers and rewarding their

loyalty by offering concessional rates of interest, better operational

flexibility in the operation of their accounts,

v) Focused attention for development of crops being grown in

the given area like Cotton, Sugarcane, Potato, Chillies, Mangoes,

Grapes, Oranges etc. Building up infrastructure for preservation and

processing these crops. Offering credit against stored farm produce

so that farmers are not forced to sell in a buyers market.

vi) Building up infrastructures at farm level through irrigation,

farm mechanisation and supportive allied activities like Dairy etc.

vii) To promote growth of industries including small artisans,

services and business sectors. For borrowers with established

credentials, the package of assistance is redefined to take care of

growth as well as seasonal credit needs without any hassles.

viii) In pursuit of achieving national objectives like better

education and housing to all, the products are re-modeled to make

them attractive with longer gestation period and lowered EMI at

affordable interest cost.

ix) The process of submission of applications for loans,

sanction, documentation and disbursements have been further

simplified.

x) Rehabilitation package for Tsunami victims.

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The various innovative schemes/card products are:

Star Composite Cash Credit (CCC):

Kinas Credit Card (KCC)

Kisan Gold Card (KGC)

Star Kisan Samadhan Card (KSC)

(CCC, KCC & KGC are now subsumed into KSC)

Star Bhoomiheen Kisan Card (BKC);

Star Artisan Credit Card (ACC);

Making-agriculture-attractive

With the 2003-4 budget giving agriculture the go-by, Devinder

Sharma outlines five criteria that nation's finance minister must

keep in mind while crafting budgetary policy for agriculture.

March 2003 - Successive Finance Ministers have spared no effort in

eulogizing agriculture. Presenting the Budget 2003-2004, Finance

Minister Jaswant Singh had remarked that agriculture is the life

blood of our economy. A year earlier, his predecessor, Yashwant

Sinha had romanticized agriculture, saying that his Budget was

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aimed at ensuring freedom of the farmer -- "kisan ki azadi".

It all began with the former Finance Minister Mr Manmohan

Singh, the chief architect of the new economic policy. In his famous1992-93 Budget speech, Singh had said "Agriculture is the

foundation of national prosperity and no strategy of economic

development can succeed in our country if it does not ensure rapid

growth of production and employment in agriculture. Nor can we

hope to provide sufficient jobs for our growing rural labour force

unless we can transform the economy of our rural areas." And yet,

he concluded by saying that agriculture being in the concurrent list,

he was expecting the States to accord top priority to the farm sector.

This unfailing lip service glorifying farmers continues

unabated. And in the bargain, Indian agriculture has been

pushed into an era of unforeseen crisis - increasing suicides

among farmers, mounting rural indebtedness, unmanageable glut at

the time of harvest, swelling rural to urban migration - clear

pointers of the gathering storm clouds over the farm sector. In fact,

ever since liberalisation became the economic mantra, and the

impetus shifted to business and industry, the persistent neglect of

agriculture has cast an ominous shadow.

Since the dawn of economic liberalization in June 1991, the

annual Budget has become a political instrument to provide sops and

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tax holidays to the corporate sector, trade and industry. In essence,

Budget 2003-2004 too is targeted at India - the urban centers. What

happens to the masses - comprising the Bharat where more than 80

per cent population lives - has never been the concern of the

successive Finance Ministers. It never was.

For a country, where nearly 85-90 per cent of the 110 million

farming families, somehow eke out a living from less than 2 hectares

of land holdings, Jaswant Singh's misplaced emphasis is on

encouraging 'precision farming' to bring in hi-tech horticulture.

Interestingly, he says precision farming technology is aimed at

judicious utilization of natural resources like land, water as well as

time. "Demonstration of these technologies will also be part of this

scheme," he added, little realizing that precision farming is a highly

sophisticated and expensive model which collapsed even in United

States at the height of the worst drought (in 2002) the country faced

in recent memory.

With the World Trade Organisation (WTO) and structural

adjustment programme finally beginning to bare its fangs, the long-

term viability of agriculture and the survival of the farming

community itself is at stake. More so, at a time when Indian

agricultural is faced with a sustainability crisis - declining

productivity, falling commodity prices and sluggish exports. The

resulting political cost of continuing with the benign neglect of

agriculture and the farming sector has finally begun to surface.

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Ressurecting agriculture should, therefore, be the obvious

challenge for any Finance Minister. Successive budgets show

emphasis, through the use of cliches like strengthening marketing

infrastructure, scientific management of scarce water resources,

empowering farmers to take informed decisions and so on. A

growing volume of evidence now clearly suggests that such jugglery

in presentation has not helped. What is needed is a fresh approach

that takes the ground realities into consideration before embarking

upon any policy imperatives.

In the rest of this article, I have made an attempt to present a

collection of five important rational decisions that would certainly

initiate the revival of Indian agriculture. All budgetary allocation for

agriculture should be made keeping these criteria for sustainable

growth in mind:

Sustainable-farming

Indian agriculture faces an unprecedented crisis in sustainability.

Foodgrain productivity in the food bowl, comprising Punjab,

Haryana, and western Uttar Pradesh, is on the decline. The green

revolution areas are encountering serious bottlenecks to growth and

productivity. Excessive mining of soil nutrients and groundwater

have already brought in soil sickness. Introducing new Centrally

Sponsored Schemes to improve production in these areas is going to

be counter-productive. Banking upon genetically engineered crops to

take care of the second-generation environmental impacts is sure to

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worsen the existing crisis. Monocultures breed pests and waste

resources.

Jaswant Singh should have made provision that encouragessustainable and traditional farming practices. He must discourage

investments and increased outlays for agricultural research that is

based on external chemical inputs like fertiliser and pesticides (glad

that he raised the prices of fertilizers, though under pressure from

World Bank). Instead, financial allocation should be made for

reviving low-input agriculture, which uses cheap and locally

available technology and in turn improves production and protects

environment. This has been amply demonstrated in several parts of

the world. Outlays earmarked for genetic engineering in agriculture

also need to be diverted to sustainable agricultural practices.

Farm-incomes

Growing indebtedness in agriculture is forcing an increasing

numbers of farmers to end their lives. This unsavory phenomenon is

a manifestation of the declining farm incomes and lack of farm

credit. Institutional finance and credit has almost disappeared over

the years. Banks are no longer treating agriculture for priority sector

lending. Rural Banks and cooperatives are deep in the red, with a

majority of them eating into their own reserves.

Bank loans for cars are available at a much cheaper rate of

interest than tractors. The more the poverty level, the more is the

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rate of interest. Some tribals in Kalahandi in Orissa who pay 460 per

cent interest to moneylenders. In neighbouring parts of Madhya

Pradesh, the rate of interest is a little lower at 360 per cent. And in

Jharkand State, tribals pay something around 160 per cent rate of

interest. Even in the frontline agricultural States of Punjab and

Haryana, 50-60 per cent rate of interest by private moneylenders is

not very uncommon.

Agriculture credit has to be revived. Finance Minister must

spell out schemes that encourage banks to provide easy credit

facilities to farmers. Cosmetic innovations like Kisan Cards and the

likes are not much helpful unless banks have the willingness to

provide support to the agrarian sector. Asking private banks to go

rural is merely an approach that may satisfy the galleries. Similarly,

budget allocation must be made for assured food procurement at

remunerative prices. In addition, procurement needs to be extended

to coarse cereals, pulses and oilseeds to provide farmers an incentive

to produce more.

In short, agriculture has to be made attractive. Finance

Minister must ensure that the Budget allocations are made in such a

way that it helps bring back the shine on the golden grain.

Drought-proofing

Recurring drought continues to engulf vast tracts of central and

north western India. The importance of drought proofing should

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have been obvious considering that foodgrain output had slumped by

over 13 per cent in 2002-03 as a result of the severe drought that

swept through the almost the entire country. Rajasthan, for instance,

faces the fourth drought year in a row. The increased emphasis on

water harvesting notwithstanding, the reduced availability of water

is emerging as a major social and economic crisis. This is because

much of the investment is going into a faulty technology of rain water

harvesting, called the "Ridge to valley" system, a technology

imported from the United States.

Investments in rain water harvesting needs to be

immediately shifted to the revival of the traditional forms of

water conservation - ponds and tanks. Subsidies for drip

irrigation and sprinkler irrigation needs to be discontinued as it

helps only the rich farmers and corporates. Fodder cultivation, crop

planning according to the water needs and availability and the

emphasis on the local breed of cattle (and improving its productivity,

rather than importing exotic breeds) need to be encouraged.

Farmers in the rainfed areas also need to be insured against

drought. This can be ensured by making it mandatory for the foreign

insurance companies to invest at least 40 per cent of their funds for

farm insurance.

Sugar-mills

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The unprecedented addition of new sugar mills by successive

governments has created a major crisis on the agriculture front.

Requiring good fertile and irrigated land for cultivation, its growth is

at the cost of staple foods like wheat and rice. With the per hectare

productivity of foodgrains on the decline in the frontline agricultural

states, diversion of good fertile land to sugarcane is not without

accompanying hiccups. What makes the switchover to sugarcane a

pernicious trend is its enormous water requirement. Sugarcane, in

fact, is the biggest threat to India's food security.

Since there is no shortage of sugar in the country, and with a

large number of mills actually being rendered unviable over the past

two decades, an immediate ban needs to be imposed on setting up

any new sugar mill. All budgetary support to the sugar industry

needs to be withdrawn as it has led to a serious environmental crisis.

Sugarcane farmers need to be encouraged to divert to

other crops. But before diversification becomes the new

mantra, it is important to first lay out the structures that would

help in taking the produce to the consumers.

Marketing

Providing an assured and remunerative market for agricultural

producers cannot be left to the market forces. The food policy

imperatives of public distribution system and announcing the

procurement prices before the crop season have to be further

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strengthened. Agri-processing too needs to be strengthened, but not

at the cost of the domestic producers. The Finance Minister must

ensure that food-processing sector uses the abundant raw material

available within the country. The 'rainbow' revolution that everyone

talks about is actually aimed at helping the industry to exploit the

farm sector. Already a number of manufacturing units, for instance,

have begun to source the agricultural raw material, including

oranges, grapes, popcorn, peas etc, from America and Europe.

Although, India is following the WTO dictates of doing away

with the food procurement system, any tinkering with what is

generally regarded as the "famine-avoidance" strategy, can be

catastrophic. The Finance Minister needs to take corrective

measures to reduce inefficiency in the system while at the same time

making it broad-based and widespread. PDS also needs to be

extended to upcoming agricultural areas in Bihar, Orissa, West

Bengal and the northeast.

What is desperately need is an annual Budget that helps bring

back the smile on the face of farmers rather than the industrialists

who have already milked the public exchequer dry.

DevinderSharma

March 2003

Devinder Sharma is a food and trade policy analyst. He also

chairs the New Delhi-based Forum for Biotechnology & Food

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Security. Among his recent works include two books GATT to WTO:

Seeds of Despair and In the Famine Trap

The post liberalisation era has witnessed a high degree of

correlation between Indias GDP growth and its agriculture growth,

wherein it has been estimated that for achieving the desired GDP

growth of around 8 per cent, agricultural growth in excess of 10 per

cent is required.

The impact of agricultural growth on farmer empowerment is

apparent. It has been estimated that one incremental percentage

growth in agriculture leads to an additional income generation of Rs

10,000 crore in the hands of the farmers thereby increasing their

disposable income and ultimately, their purchasing power.

Owing to diverse and favourable agro-climatic conditions, India has

a significant comparative advantage in agricultural production and

the potential to be globally competitive by producing a wide-variety

of high quality produce. These advantages if leveraged optimally, can

translate into India becoming a leading food supplier to the world.

Further, with a population of 1.08 billion, growing at about 1.6 per

cent per annum and with favourable demographics, India is a large

consumption hub for food products.

While agricultural production in the country is significant, the agro

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processing industry is still at a nascent stage with less than 2 per cent

of the fruit and vegetables production being processed as compared

to about 80 per cent in Malaysia, 30 per cent in Thailand and 60-70

per cent in United Kingdom and United States of America. The

growth of the Indian food processing industry has been sub-optimal

due to the prevalence of several aspects that have hindered fullest

realisation of the immense potential. In terms of agricultural trade,

India has a 1.3 per cent (Rs 33,000 crore in 2002-03) share of global

food & agricultural trade ($460 billion), despite its production

leadership in agriculture. Indias exports still constitute the low-

value commodity and primary processed items where price

realisations are low. In addition, many products are showing single

digit or negative growth.

The reasons for Indias insignificant share in global trade include

supply side factors such as lack of consistency in supply and quality,

lack of cost competitiveness, and demand side factors such as non-

tariff barriers and poor perception of Indian food products in the

international markets.

Issues and challenges

Indian agriculture sector has the potential to transform India

into the leading agro economy of the world. However, a holistic and

integrated approach is required to achieve sustainable development

of the sector. Such efforts so far have largely remained fragmented

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and confined to limited areas.

One of the major constraints hindering the progress of Indian

agribusiness is lack of supply chain integration wherein different

stakeholders (viz farmers, agri-input players, processors and

retailers) have been operating in isolation. This lack of integration

has created bottlenecks at each stage thereby creating mismatches in

the demand-supply situation. Farmers suffer from lack of linkages to

the demand side as they are unaware on the kind of crop varieties

which have high demand potential. Similarly, the agri-input players

such as seed companies, agrochemical suppliers are not linked to the

demand side to understand the processable or marketable varieties

of seeds and inputs to be supplied.

From the demand side the agro-processing industry also suffers due

to the lack of backward integration. Interaction between agro-

processing industry and input players and farmers on the precise

nature of inputs required for processing commodities is limited. This

has deprived the agro processing industry from capitalising on

potential economies of scale and from achieving a degree of

procurement comfort based on produce quality.

The problem of isolated operation of stakeholders which is further

compounded by the lack of adequate infrastructure (such as silos,

warehousing and storage facilities) and ad-mixture problems as well

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as non existence of value-added service provision is ultimately

leading to the erosion of the competitive edge of Indian agribusiness.

Integrated supply chain solutions are the key to achieving

sustainable development of the food processing sector in India.

Specialised financial institutions with domiciled expertise in

agribusiness are fully equipped to provide these solutions with

orientation towards their technical and financial sustainability.

Moreover, although the technological (IT) and managerial

revolutions in India have transformed the face of the urban and

industrial India, the benefits of the same have continually eluded the

Indian agriculture sector. Non and untimely availability of quality

inputs like seed, fertiliser, and plant protection chemicals is often felt

by farmers and is critical for successful production of value added

crops. Poor infrastructure like roads, power, supply, port, storage,

processing, marketing and the value addition problems are

significant. Yet another hindrance relates to unfavourable farm

policies on farm size, customised technologies, subsidies, domestic

marketing, international trade, credit insurance, food laws, entry of

private sector, co-operatives etc.

The way forward

Over the years, the role of the banking community in fueling

agriculture growth has been limited. Till date, banks have largely

ventured into the agriculture sector only to fulfill their priority

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sector obligations. In fact, many banks have taken softer options

such as investing in the Rural Infrastructure Development Fund

(RIDF) instead of directly lending to the farmers. Bankers

reluctance to finance the agriculture sector stems from the fact that

there is a dearth of bankable projects in the sector presently. The

resultant lack of institutional financing options has forced the

farmers to avail funding from money lenders at exorbitant rates of

interest. Structured project development in the micro/rural sector is

the key factor that can help India realise its true food and

agribusiness potential and also sustainable farmer empowerment

and rural entrepreneurship. In fact, adopting a projectable approach

in the micro sector will lead to the development of agribusiness in the

country.

A paradigm shift is required in the outlook to agriculture;

production to marketing orientation and from a quantity to quality

focus. A scientific and innovative agricultural approach to

agriculture will enable us to compete globally in cost and quality

with respect to global benchmarking and our core competitive

strengths in various agriculture produces.

Finally, the need imposed and expressed by agriculture and rural

sector through recent electoral mandate clearly reflect need for

urgent intervention in the sector. While immediate efforts by

government towards increasing financial assistance in the sector are

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necessary, there is a pressing need for the banking community to

ensure that government support to rural and agriculture sector gets

leveraged multifold, and ensures empowerment of rural India by

enabling entrepreneurship in them, leading to our country emerging

as a sustainable economic superpower. Adopting a knowledge-based

approach to develop risk mitigating and innovative project financing

structures is a key requirement for enhanced financing of the sector

which will ultimately result in increased commercial viability and

ensure sustainable development of Indian agriculture.

Rural banking in India started since the establishment of

banking sector in India. Rural Banks in those days mainly focussed

upon the agro sector. Regional rural banks in India penetrated every

corner of the country and extended a helping hand in the growth

process of the country.

SBI has 30 Regional Rural Banks in India known as RRBs. The rural

banks of SBI is spread in 13 states extending from Kashmir to

Karnataka and Himachal Pradesh to North East. The total number

of SBIs Regional Rural Banks in India branches is 2349 (16%). Till

date in rural banking in India, there are 14,475 rural banks in the

country of which 2126 (91%) are located in remote rural areas.

Apart from SBI, there are other few banks which functions for the

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development of the rural areas in India. Few of them are as follows.

Haryana State Cooperative Apex Bank Limited

The Haryana State Cooperative Apex Bank Ltd. commonly called as

HARCOBANK plays a vital role in rural banking in the economy of

Haryana State and has been providing aids and financing farmers,

rural artisans, agricultural labourers, entrepreneurs, etc. in the state

and giving service to its depositors.

NABARD

National Bank for Agriculture and Rural Development (NABARD)

is a development bank in the sector of Regional Rural Banks in

India. It provides and regulates credit and gives service for the

promotion and development of rural sectors mainly agriculture,

small scale industries, cottage and village industries, handicrafts. It

also finance rural crafts and other allied rural economic activities to

promote integrated rural development. It helps in securing rural

prosperity and its connected matters.

Sindhanur Urban Souharda Co-operative Bank

Sindhanur Urban Souharda Co-operative Bank, popularly known as

SUCO BANK is the first of its kind in rural banks of India. The

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impressive story of its inception is interesting and inspiring for all

the youth of this country.

United Bank of India

United Bank of India (UBI) also plays an important role in regional

rural banks. It has expanded its branch network in a big way to

actively participate in the developmental of the rural and semi-urban

areas in conformity with the objectives of nationalisation.

Syndicate Bank

Syndicate Bank was firmly rooted in rural India as rural banking

and have a clear vision of future India by understanding the

grassroot realities. Its progress has been abreast of the phase of

progressive banking in India especially in rural bank

Fiscal Administration

Historically, the Indian government has pursued a cautious

policy with regard to financing budgets, allowing only small amounts

of deficit spending. Budget deficits increased in the late 1980s, and

the necessity of financing these deficits from foreign borrowing

contributed to the 1990 balance of payments crisis. The central

government budget deficit reached 8.4 percent of GDP in FY 1990,

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up from 2.6 percent in FY 1970, 5.9 percent in FY 1980, and 7.8

percent in FY 1989. The deficit was cut to 5.9 percent in FY 1991 and

5.2 percent in FY 1992, but widened to 7.4 percent in FY 1993. It was

expected to recede to 6.2 percent in FY 1995.

The central government's budget deficits during the 1980s

increased the total public debt rapidly until in FY 1991 it stood at

Rs3.9 trillion. The bulk of this debt was owed to citizens and

domestic institutions and firms, particularly the central bank.

Readers of Indian monetary statistics should be alert to the use of the

terms lakh (see Glossary) and crore (see Glossary), which are used to

express higher numbers.

India Monetary Process

The basic elements of the financial system were established

during British rule (1757-1947). The national currency, the rupee,

had long been used domestically before independence and even

circulated abroad, for example, in the Persian Gulf region. Foreign

banks, mainly British and including some from such other parts of

the empire as Hong Kong, provided banking and other services. The

Reserve Bank of India was formed in 1935 as a private bank, but it

also carried out some central bank functions. This colonial banking

system, however, was geared to foreign trade and short-term loans.

Banking was concentrated in the major port cities.

The Reserve Bank was nationalized on January 1, 1949, and

given broader powers. It was the bank of issue for all rupee notes

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higher than the one-rupee denomination; the agent of the Ministry of

Finance in controlling foreign exchange; and the banker to the

central and state governments, commercial banks, state cooperative

banks, and other financial institutions. The Reserve Bank

formulated and administered monetary policy to promote stable

prices and higher production. It was given increasing responsibilities

for the development of banking and credit and to coordinate banking

and credit with the five-year plans. The Reserve Bank had a number

of tools with which to affect commercial bank credit.

After independence the government sought to adapt the

banking system to promote development and formed a number of

specialized institutions to provide credit to industry, agriculture, and

small businesses. Banking penetrated rural areas, and agricultural

and industrial credit cooperatives were promoted. Deposit insurance

and a system of postal savings banks and offices fostered use by

small savers. Subsidized credit was provided to particular groups or

activities considered in need and which deserved such help. A credit

guarantee corporation covered loans by commercial banks to small

traders, transport operators, self-employed persons, and other

borrowers not otherwise effectively covered by major institutions.

The system effectively reached all kinds of savers and provided

credit to many different customers.

The government nationalized fourteen major private

commercial banks in 1969 and six more in 1980. Nationalization

forced commercial banks increasingly to meet the credit

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requirements of the weaker sections of the nation and to eliminate

monopolization by vested interests of large industry, trade, and

agriculture.

The banking system in India expanded rapidly after

nationalization. The number of bank branches, for instance,

increased from about 7,000 in 1969 to more than 60,000 in 1994, two-

thirds of which were in rural areas. The deposit base rose from Rs50

billion in 1969 to around Rs3.5 trillion in 1994. Nevertheless,

currency accounted for well over 50 percent of all the money supply

circulating among the public. In 1992 the nationalized banks held 93

percent of all deposits.

In FY 1990, twenty-three foreign banks operated in India. The

most important were ANZ Grindlays Bank, Citibank, the Hongkong

and Shanghai Banking Corporation, and Standard Chartered Bank.

Public-sector banks in India are required to reserve their

lending based on 40 percent of their deposits for priority sectors,

especially agriculture, at favorable rates. In addition, 35 percent of

their deposits have to be held in liquid form to satisfy statutory

liquidity requirements, and 15 percent are needed to meet the cash

reserve requirements of the Reserve Bank. Both these percentages

represent an easing of earlier requirements, but only a small

proportion of public-sector banks' resources can be deployed freely.

In late 1994, the rate of interest on bank loans was deregulated, but

deposit rates were still subject to ceilings.

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More than 50 percent of bank lending is to the government

sector. With the onset of economic reform, India's banks were

experiencing major financial losses as the result of low productivity,

bad loans, and poor capitalization. Seeking to stabilize the banking

industry, the Reserve Bank of India developed new reporting

formats and has initiated takeovers and mergers of smaller banks

that were operating with financial losses.

India has a rapidly expanding stock market that in 1993 listed

around 5,000 companies in fourteen stock exchanges, although only

the stocks of about 400 of these companies were actively traded.

Financial institutions and government bodies controlled an estimated

45 percent of all listed capital. In April 1992, the Bombay stock

market, the nation's largest with a market capital of US$65.1 billion,

collapsed, in part because of revelations about financial malpractice

amounting to US$2 billion. Afterward, the Securities and Exchange

Board of India, the government's capital market regulator,

implemented reforms designed to strengthen investor confidence in

the stock market. In the mid-1990s, foreign institutional investors

took greater interest than ever before in the Indian stock markets,

investing around US$2 billion in FY 1993 alone.

Despite increases in energy costs and other pressures from the

world economy, for most of the period since independence India has

not experienced severe inflation. The underlying average rate of

inflation, however, has tended to rise. Consumer prices rose at an

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annual average of 2.1 percent in the 1950s, 6.3 percent in the 1960s,

7.8 percent in the 1970s, and 8.5 percent in the 1980s.

Three factors lay behind India's relative price stability. First,

the government has intervened, either directly or indirectly, to keep

stable the price of certain staples, including wheat, rice, cloth, and

sugar. Second, monetary regulation has restricted growth in the

money supply. Third, the overall influence of the labor unions on

wages has been small because of the weakness of the unions in

India's labor surplus economy.

India Story Just Got Better

Within a week (31 Dec.-7 Jan), the UPA Government has revised the

GDP growth estimates for both, the previous fiscal as well as for the

current year. The FY04 estimate was raised from an already

impressive 8.2% to an even better 8.5%, and the forecast for FY05

was raised from 6-6.5% to 6.9%. The improved performance for the

previous fiscal is not surprising, as it was on a low base, and a

bumper harvest. But, to have an economy grow at nearly 7% on an

extremely high base is just superb. What makes the upward revision

in the current fiscals growth projection even better is that the farm

output this year will be much lower than last years production.

Agriculture growth this year will shrink to a negligible 1.1% versus a

solid 9.6% in the previous fiscal. Still, the overall impact on the

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Another side of the Indian economy that looks to be on a roll is

the services industry. It now accounts for over 50% of the GDP, and

has emerged as the major source of employment generation.

Financing, insurance, real estate & business services is likely to grow

by 7.1%, unchanged from the previous fiscal year. Trade, hotels,

transport & communications sector is expected to clock a growth

rate of 11.3%, a tad lower than 11.8% last year. The role of services

has assumed a lot of significance even as that of the agriculture has

diminished considerably. Together with the industrial sector, the

services have become a major driving force for the Indian economy.

With both of them doing extremely well and no signs of any big

hiccups on the horizon, one can concur that India can maintain a

growth rate of around 7%.

That is not to suggest that agriculture is not important for the

economy. Though agriculture now comprises just about a quarter of

Indias GDP, it provides employment to some 70% of its population.

All the more reason for the Government to come up with sound

policies that will ensure stable and sustainable growth in the farm

sector, irrespective of how bad the monsoon is. In light of this, the

National Common Minimum Programme (NCMP) devised by the

Congress-led regime seems to have its heart at the right place. It calls

for large-scale investment in the rural sector and has already

committed to boosting credit to the farm sector. Due to time

constraint, Finance Minister P. Chidambaram could not implement

the NCMP agenda for the rural sector in its entirety. But, he is

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expected to announce a series of measures in the upcoming budget to

give a major fillip to the rural sector. The success of these steps will

be crucial for achieving a higher GDP growth rate over a sustainable

period of time. That's when India will be really shining.

Hemant P. Maradia

Crop Insurance History: In our country crop production has been

subjected to the vagaries of the climate. Some of the other problems

that the Indian agriculture is constantly tackling with are the large-

scale damages that are caused as a result of the attack of pests and

diseases. It is in a scenario such as this in India that the issue of crop

insurance assumes a vital role in the stable growth of the

agricultural sector. Tracing the Crop Insurance History in India we

see that it was started with the introduction of the All-Risk

Comprehensive Crop Insurance Scheme (CCIS) that covered the

major crops. This scheme was introduced in 1985. In fact this period

of introduction also coincided with the introduction of the Seventh-

Five-year plan. This initial scheme was of course later substituted

and replaced by the National Agricultural Insurance Scheme. This

substitution came into effect from 1999. These Schemes that have

been introduced throughout the crop insurance history have been

preceded by years of preparation, studies, planning, experiments

and trials on a pilot basis.

In the crop insurance history, the question of introducing a crop

insurance scheme was taken up for examination soon after the

Indian independence. The first aspect that was examined related to

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the modalities of crop insurance. The issue under consideration was

about whether the crop insurance should be offered under an

Individual approach or on Homogenous area approach.

The Individual approach of the scheme indemnifies the farmer to the

full extent of the losses. Also the premium that is to be paid by him is

determined with reference to his own past yield and loss experience.

The Individual approach for these schemes necessitates reliable and

accurate data of crop yields of individual farmers for a sufficiently

long period, for fixation of premium on actuarially sound basis.

The Homogenous area approach on the other hand was aimed at

envisaging a homogeneous area from the point of view of crop

production and similarity of annual variability of crop production.

The homogenous area approach was found to be more favorable.

This is because it would facilitate the provision of a single unit

treatment to various agro-climatically homogenous areas and the

individual farmers and allow them to pay the same rate of premium

and receive the same benefits, irrespective of their individual

fortunes.

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Crop Insurance Risks covered:

The Crop insurance schemes aim at providing comprehensive risk

insurance which cover the yield losses that occur to theagricultural output of small and marginal farmers due to non

preventable risks. The crop insurance risks covered under the

non-preventable category are listed below:

a. Natural Fire and Lightning

b. Storm, Hailstorm, Cyclone, Typhoon, Tempest, Hurricane,

Tornado etc.

c. Flood, Inundation and Landslide

d. Drought, Dry spells

e. Pests/ Diseases etc.

The crops insurance risks does not cover any of the losses that arise

out of war and nuclear risks, malicious damage and other risks

which are preventable risks.

The sum insured under the crop insurance risks covered usually

extends to the value of the threshold yield of the insured crop.

This is usually subject to the option of the insured farmers.

Nevertheless, a farmer may also choose to insure his crop beyond

value of the threshold yield level up to 150% of average yield of

the notified area on payment of premium at commercial rates.

Apart from the risks covered in the crop insurance scheme, what

is important is the sum insured. In case of Loanee farmers the

sum insured would be at least equal to the amount of crop loan

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advanced. Further, in the case of the Loanee farmers, the

insurance charges that will be levied will be additional to the Scale

of Finance for the purpose of obtaining loan.

Apart from the above mentioned issues, the matters of Crop Loan

disbursement procedures, which have been outlined by the RBI /

NABARD are binding. The insurance premium issues still stand at

an undecided state as the transition to the actuarial regime in case

of cereals, millets, pulses & oilseeds is expected to be made in a

period of five years.

Crop Insurance Schemes in India:

In order to provide a boost to the agriculture in India, a number of

experimental crop insurance schemes have been introduced in the

country. The first ones of the experimental crop insurance schemes has

been a Pilot Crop Insurance scheme. This was introduced by GIC from

the year 1979.

Some of the important features of the scheme were that the scheme was

based on "Area Approach". This scheme covered crops such as Cereals,

Millets, Oilseeds, Cotton, Potato and Gram. The scheme was confined to

loanee farmers only and on voluntary basis. The risk was shared

between General Insurance Corporation of India and State

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Governments in the ratio of 2:1. The maximum sum that could be

insured under the scheme was 100% of the crop loan, which was later

increased to 150%.

Under this scheme, 50% of the subsidy was provided for insurance

charges which was payable to the small / marginal farmers by the State

Government & the Government of India on 50:50 basis.

Among the earlier crop insurance schemes that were introduced was a

comprehensive Crop Insurance Scheme. The Government of India

introduced the Comprehensive Crop Insurance Scheme with effect from

1st April 1985. This scheme was introduced with the active participation

of State Governments. The Scheme was optional for the State

Governments.

This Scheme was linked to the short-term crop credit that was extended

to the farmers and was implemented using the Homogeneous Area

approach. The number of states that were covered under the scheme

were 15 States and the number of UTs that were included were 2. This

Scheme was implemented until Kharif 1999. Some of the important

features of this scheme allowed a cover to the farmers availing crop

loans from Financial Institutions for growing food crops & oilseeds on

compulsory basis. The coverage under this scheme was restricted to

100% of crop loan subject to a maximum of Rs. 10,000/- per farmer.

The premium rates for Cereals and Millets were 2% and for Pulses and

Oil seeds 5%.

The premium and risk claims were shared in a ratio of 2:1 by the

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central and state Government. The Scheme was optional to State

Governments.

Rural banking in India started since the establishment of bankingsector in India. Rural Banks in those days mainly focussed upon the

agro sector. Regional rural banks in India penetrated every corner of

the country and extended a helping hand in the growth process of the

country.

SBI has 30 Regional Rural Banks in India known as RRBs. The rural

banks of SBI is spread in 13 states extending from Kashmir to

Karnataka and Himachal Pradesh to North East. The total number of

SBIs Regional Rural Banks in India branches is 2349 (16%). Till date in

rural banking in India, there are 14,475 rural banks in the country of

which 2126 (91%) are located in remote rural areas.

Apart from SBI, there are other few banks which functions for the

development of the rural areas in India. Few of them are as follows.

Haryana State Cooperative Apex Bank Limited

The Haryana State Cooperative Apex Bank Ltd. commonly called as

HARCOBANK plays a vital role in rural banking in the economy of

Haryana State and has been providing aids and financing farmers, rural

artisans, agricultural labourers, entrepreneurs, etc. in the state and

giving service to its depositors.

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NABARD

National Bank for Agriculture and Rural Development (NABARD) is a

development bank in the sector of Regional Rural Banks in India. It

provides and regulates credit and gives service for the promotion and

development of rural sectors mainly agriculture, small scale industries,

cottage and village industries, handicrafts. It also finance rural crafts

and other allied rural economic activities to promote integrated rural

development. It helps in securing rural prosperity and its connected

matters.

Sindhanur Urban Souharda Co-operative Bank

Sindhanur Urban Souharda Co-operative Bank, popularly known as

SUCO BANK is the first of its kind in rural banks of India. The

impressive story of its inception is interesting and inspiring for all the

youth of this country.

United Bank of India

United Bank of India (UBI) also plays an important role in regional

rural banks. It has expanded its branch network in a big way to actively

participate in the developmental of the rural and semi-urban areas in

conformity with the objectives of nationalisation.

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Syndicate Bank

Syndicate Bank was firmly rooted in rural India as rural banking and

have a clear vision of future India by understanding the grassroot

realities. Its progress has been abreast of the phase of progressive

banking in India especially in rural banks.

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agriculture and finance in rural sector

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