Supply-demand mismatch push up food prices
Supply-demand mismatch is pushing up food prices globally. Pumping in money and technology into the fields is the only solution. Gainers & Losers | Market Calendar
India's agriculture sector - contributing around a fifth of GDP and employing around half the work force - is devoid of capital formation and investment, adversely affecting productivity, output and availability. To enable the sector to grow at more than 3.36%, recorded during the last two decades, there is need for capital formation and investment for which an improvement in agro-rural financial architecture is a pre-requisite.
Agro-rural finance in India was an incomplete financial sketch displaying low levels of savings, unsatiated demand of credit for agricultural/non-agricultural purposes, low credit worthiness of borrowers, presence of moneylender and absence of alternate sources of finance from institutions like commercial or cooperative banks.
To this sketch was added a decline in public investment and other shading in the form of credit at subsidised interest rates, refinance of agriculture advances, periodical writing off of loans, crop insurance, finance from regional rural banks (RRBs), self help groups (SHGs) and Kisan Credit Cards (KCC), among others. The result was inadequate finance at high interest rates.
Agro-rural finance in India was an incomplete financial sketch displaying low levels of savings, unsatiated demand of credit for agricultural/non-agricultural purposes, low credit worthiness of borrowers, presence of moneylender and absence of alternate sources of finance from institutions like commercial or cooperative banks.
To this sketch was added a decline in public investment and other shading in the form of credit at subsidised interest rates, refinance of agriculture advances, periodical writing off of loans, crop insurance, finance from regional rural banks (RRBs), self help groups (SHGs) and Kisan Credit Cards (KCC), among others. The result was inadequate finance at high interest rates.
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Higher growth of the agriculture sector shall foster overall growth, one of the reasons spelled out for financial sector reforms by the Committee for Financial Sector Reforms (CFSR). The recommendations of CFSR on agro-rural finance are directed at enhancing individual's access to finance, the expansion of financial institutions and infrastructure and their transformation into efficient institutions.
CFSR recommendation of transfers of money from government programmes to the accounts of the beneficiaries is laudable but is a long and arduous path for a government that still does not make all payments to its employees through bank accounts. The proposed target that 90% of households should have access to bank accounts in three years should be replaced with a target that 90% of amount transferred is to beneficiary accounts in three years.
This apart from benefiting the poor will also boost banking volumes and efficiently channel funds. Transfers should take place from the originating tier of the government (Centre or state) and not from the last tier (state corporation/panchayat/DRDA) after devolving many stages.
CFSR recommendation of additional financial intermediaries to enable transfers and provision of financial services is welcome . These institutions should, however, function under a consortium/ flag of one of the banks so that all financial services are provided. They should be free for mergers and take-overs .
CFSR recommendations in respect of moneylenders and cooperative banks need a relook. CFSR records the presence of the moneylender as the most frequent source of finance and the inability of financial institutions to provide services to all. Drawing on telecom technology, CFSR notes the absence of last mile connectivity.
The moneylender, who caught the imagination of novelists like Prem Chand and Bollywood filmmakers like in Do Bigha Zameen, continues to be treated like an untouchable by the Indian financial system for his charging usurious rates of interest, depriving the borrower of all assets (moveable and immovable), and did not catch the fancy of CFSR.
The moneylender needs to be acknowledged as last mile connectivity and in the absence of alternatives and needs to be tamed and his exploitation minimised, through competition from more of his clan and from other such clans.
Performance of cooperative banks has been poor and, with the present level of interference by political and bureaucratic leadership, unlikely to improve. However, available infrastructure of the cooperative banks needs to be fully exploited.
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This could be done by using technology, networking the branches and permitting mergers and acquisitions facilitated by treating each branch as a profit centre available for sale to any financial entity in single or multiple units. This would be better than another round of restructuring, pumping in more resources or closing unviable branches.CFSR also pins hope that warehouse receipts to be introduced as part of the Warehousing (Development and Regulation) Act, 2008, would facilitate investment in warehousing and supply chain infrastructure and also help to provide agriculture finance. Warehouse receipts serving as bills of exchange and treated as monetary assets for almost all purposes will strictly provide finance for agricultural trade from which the agricultural producer would not benefit.
The agricultural producer is already shortchanged by the trader because of imperfect and monopoly markets for agricultural commodities and it is unlikely that improvements in agricultural trade finance shall translate to agriculture production finance.
The agricultural trader would have little interest in enhancing investment or productivity of the agricultural producer. The agricultural producer should, however, be encouraged to develop economic interest in storage, transport, supply chain and market infrastructure without a law or quota which, as experienced in the past, creates inefficient market distortions and establishes a vested interest difficult to dislodge.
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The logic of warehouse receipts serving as bills of exchange if extended to daily sales transactions in the mandi committee with suitable fiat that transactions receipts be payable only through financial institutions have potential to create agricultural production finance. Payments through financial institutions shall inculcate in the agriculturist habit to transact - deposit, withdraw, overdraw, transfer, defer payments. This along with proposed reforms on titling and registration of land records shall create a credit history and worthiness for the agriculturist. This calls for a long list of reforms, foremost among which is doing away with the monopoly of the mandi committee. This would entail reforming the mandi committee (Agricultural Produce Marketing Committee (APMC) reforms envisaged in the APMC Act 2003) and the Arhati (broker).
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Success of the implementation of CFSR recommendations and additional suggestions depends on financial institutions adapting to rural financial needs.The author is in the Indian Economic Service. Views are personal.
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