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Surinder Sud: Investing in the farm

Farmers need greater access to credit and risk-hedging tools

Surinder Sud  |  New Delhi 

Farmers won't invest unless they earn more - and that requires greater access to credit and risk-hedging tools.

The Economic Survey 2008-09 points out that the agriculture sector, which clocked an average growth of over 4.9 per cent over three years (2005-06 to 2007-08), was responsible for a larger part of the overall growth in the year’s GDP. But, during the same phase of robust growth, while the Gross Capital Formation (GCF) in the economy steadily went up, it kept declining for agriculture.This is a matter of concern.

The share of agriculture in the total GCF (at 1999-2000 prices) fell from 7.7 per cent in 2004-05 to 7.2 per cent in 2005-06 and further to 7 per cent in 2006-07. What is really significant is that this decline has been caused by the fall in the share of the private sector in the GCF — in the past, the trend was the reverse.

According to the numbers given in the Survey, the private sector’s share in the GCF has dropped from 7.7 per cent in 2004-05 to 7.1 per cent in 2005-06 and to 6.6 per cent in 2006-07. The private sector’s share in 1999-2000 was as high as 11.9 per cent.

Since the growth rates of the GCF in different sectors are indicative of the direction of fresh investment in those sectors, the waning private-sector GCF in agriculture is a cause for disquiet. It is a clear indication that farmers — the main contributors to private investment in agriculture — have failed to acquire capacity to invest more despite the growth the farm-sector GDP.

The reasons for this are several and quite varied. Although the prices of agri-commodities have remained high in the wholesale and retail markets during the larger part of this phase, the farmer gets less than half the retail price. This has adversely affected the profitability of agriculture. It was found in the 59th round of the National Sample Survey Organisation (NSSO) that 40 per cent of the farmers wished to quit farming. While 27 per cent considered it unprofitable, 8 per cent deemed it too risky.

The Minimum Support Prices (MSP) are available only to the producers of a few crops, notably wheat, rice and, to some extent, cotton. And these are available only in a few states, where the official agencies operate in agricultural markets. Elsewhere, the farmers usually have to dispose of their produce at below the MSP. Even the Economic Survey has conceded that there is a ‘need to narrow the gap between producer prices and consumer prices through proper marketing support’.

Easy access to cheap credit, which is critical for boosting private investment in agriculture, is not available to the bulk of the farm community. The report of the committee on financial inclusion (January 2008) has revealed that more than 73 per cent of farmer households have no access to any formal sources of credit. Instead of populist measures like loan waivers, the stress should, therefore, be on getting more farmers into the institutional credit network. This will not only wean them off the usurious moneylenders, but also improve their capacity to invest in productivity-enhancing measures.

Moreover, in the absence of risk-hedging mechanisms, such as crop insurance, options trading and the like, farmers have little incentive to step up investment in an innately hazardous venture like agriculture. The NSSO survey had shown that only 4 per cent of farmer households had ever insured their crops; about 57 per cent did not even know that crops could be insured.

Induction of new technology is essential for agriculture to be economically-viable and investment-worthy. However, for want of information, farmers cannot access new technology. The NSSO survey showed that only 30 per cent of farmers adopted some new practice during the survey year. When it came to technical information, only 6 per cent of the farmers relied on the extension agencies and even less (3 per cent) on government agencies. For the others, the main source of information on technology was the input-suppliers who had their own vested trade interests.

Such issues, obviously, need to be addressed to boost private investment in agriculture and put it on a sound footing.  

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First Published: Tue, July 14 2009. 00:58 IST