Radhakrishna Committee on Rural Indebtedness

 

 
The Context
The issue of farmers suicides is a burning one- one that has forced the central and state governments to offer relief packages for the affected. The Radhakrishna Committee was constituted to analyse  the neglect of agricultural in the planning process and the agricultural crisis that has resulted thereof. Despite the many factors that would draw attention to this, it is the problem of rural indebtedness that has compelled policy makers to take corrective measures.
 
Key aspects of the response
1. Factors leading to the present agrarian crisis
2. States affected
3. Recommendations- policy interventions and institutional reforms
4. Criticism of the Prime Minister's Relief Package of Rs. 17000 crores to 31 distress-affected districts
5. Perspective of the different political parties on the report and the PM's relief package

 

 

Reference material

1. The Radhakrishna Committee report http://www.igidr.ac.in/pdf/publication/PP-059.pdf 

 

 

Requested By

A senior ex RS BJP MP from Gujarat

 

 

DUE DATE: March 7, 2008

 

 

Response

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Radhakrishna Committee Report on Rural Indebtedness

 

A Summary

 

 

I. Background

 

In view of the growing problem of farmers suicides and rural impoverishment on account of the slow growth of the agricultural sector (around 2.3% for the period of the Xth Plan), the Cabinet set up the Expert Group on Rural Indebtedness, headed by Prof. Radhakrishna, after the Prime Minister’s visit to Vidarbha in 2006. The Committee submitted its report in July 2007.  The Committee looks at the agrarian crisis and discusses the structural and institutional nature of the problem. Before examining the issue of indebtedness itself, it looks at the failure of providing adequate credit in rural areas, which has precipitated the current problem. This summary will also review the main recommendations of the committee.

 

 

II. The Agrarian Crisis: Roots of the Problem

 

There has been a significant slowdown in the growth of the agricultural sector in the past two decades, and this is particularly accentuated when one compares it to the other sectors of the economy. The share of agriculture in the national product has considerably reduced, but the number of workers depending on it for their livelihoods has hardly changed. The reasons for the current agrarian crisis are various, and they have all acted together in order to manifest the problem in extreme forms such as farmers’ suicides. The Radhakrishna Committee discusses the problem in various structural and institutional dimensions. The causes include technological, ecological, socio-cultural and policy related problems.

 

The Indian economy is structured such that a large number of people are dependent on agriculture for their livelihoods, although agriculture’s share in the GDP continues to plummet. The nature of the problem, as explained by the Radhakrishna Committee can be explained as follows:

 

           

 

·         An excessive proportion of the population is dependent on agriculture. In 2004-2005, from the estimated population of 1092 million in India, 71.4% were in rural areas. Of the total work force, some 56% worked in agriculture, and yet the share of agriculture in the GDP was around 20% (as against some 42% in 1972-73)

 

·         The rural economy continues to remain by and large undiversified (most of the workers in rural areas are engaged in agriculture).

 

·         This has resulted in increasing pressure on land, or a decline in the availability of land per agricultural worker. The consequence has been increasing number of holdings with lower size, or increasing marginalization of land holdings. Over the period 1960-61 to 2003, the number of holdings doubled from 51 million to 101 million, while the area operated declined from 133 million hectares to 108 million hectares.

 

·         Increasing stress on water resources:  There is both the increasing stress on available water resources, as well as the unequal availability of water across the country. India has 16% of the population with only about 4% of total available fresh water. Rainwater is the principal water source, covering 60% of the net sown areas, but this is variable both in terms of geographical area as well as the quantity. A large number of the poor in India live in rainfed areas. Groundwater has emerged as an important source of irrigation, although it has created problems of over exploitation.

 

·         Wide regional disparity: There are wide disparities between different states as regards the productivity and growth in agriculture on account of environmental and governance related issues. For instance, Punjab’s worker productivity of Rs. 35,000 during 2004-05 was 7.5 times that of Bihar. It is basically this difference in per worker productivity that accounts for large differences in standards of living of agricultural workers across states. The cause for concern is that during 1999-2000 to 2004-05, there was a decline in per worker productivity in agriculture in eight out of seventeen states.

 

 

 

Institutional, Technological and Ecological Issues

 

 

Apart from the structure of the Indian economy, there are a number of institutional, technological and ecological issues that create obstacles in lifting the agricultural sector from its current state.  These include:

 

 

·         Availability of Credit: Arguably the most important factor that has contributed to the agrarian crisis has been the lack of availability of credit to small and medium farmers. Specifically, the functioning of rural credit cooperative societies has deteriorated and there has been a neglect of social priorities in commercial and regional rural banks. Targeted and priority lending is under pressure and the consequence of all of these has been the growing dependence on non-institutional sources of credit, especially money-lenders who charge exorbitant rates of interest.

 

 

o   Credit cooperative banks which were once a dominant form of institutional credit (around 70%), has now declined to around 20%. The primary source of institutional credit is now commercial banks, although cooperative banks continue to have greater reach. The Vaidyanathan Committee recommended several measures to revamp the cooperative structure in India, including providing greater autonomy, improving capacity and bettering the regulatory structure.

 

o   Commercial Banks account for the lion’s share of institutional credit in the rural sector. However, post liberalisation, there has been a decline in their offerings to agriculture, as well as a reduction in the number of rural braches (now around 45% of total branches) and accounts.  Since 2004-05, the growth of commercial banks credit to agriculture has picked up due to the implementation of government policy of doubling agricultural credit; even then, the share of commercial banks credit to agriculture in total credit has fallen short of the mandated target.

 

o   The Regional Rural Banks functioned well in the beginning for more than a decade after their establishment in 1975. Their performance in the nineties deteriorated. Since 2002, it has been improving primarily as a result of their linkage with SHGs. The linkage has also enabled them to revert to their original mandate of serving the rural poor.

 

o   There are some recent institutional innovations that could benefit the farming community. These include federations of farmers’ SHGs, agri-clinics and the Bharat Kisan Cards (BKCs). If nurtured, these institutions will not only lead to expansion of agricultural credit as a whole but also enlarge its flow to marginal and small farmers.

 

o   Within the farming community, marginal farmer households are the most distressed group. There is a need to create economic opportunities in off-farm and rural non-farm activities targeted at the marginal farmers. The SHG-Bank linkage programme should provide credit to such activities.

 

o   There are large regional variations in the disbursal of bank credit to agriculture. For example, the southern region accounted for nearly one-third of the total outstanding agricultural credit disbursed nationally although they accounted for less than one-fifth of total farm households in the country. On the other hand, the eastern region’s share in credit is much lower than its share in farmer households.

 

 

·         Technology fatigue: The 1990’s have seen a gradual deceleration in the growth rate of most crops, especially rice and wheat. The seed-fertiliser technology seems to have exhausted its potential and is no longer cost efficient. A major reason for this is reduced public investment in agricultural research and technology. The policy makers are relying more on technology imports rather than developing indigenous technology.

 

• Inadequate public investment in the agricultural sector has also resulted in limited extension services, which are important for the transfer of knowledge regarding more efficient cultivation mechanisms and better seeds and technology from the agricultural institutes to the farmers on the ground.

   

·         Environmental Stress: This includes depletion in the quality of soil, groundwater and the growing pollution of river and canal water. It is estimated that around 45% of the total geographical area is affected by serious soil erosion through gully and ravine formation, waterlogging and shifting cultivation. Another principal source of soil depletion is the unbalanced use of fertilisers.

 

 

 

III. The Debt Crisis: Its Nature and Consequences

 

 

The previous part dealt with the Radhakrishna Committee’s findings on the roots of the agrarian crisis. The clearest manifestation of the crisis is the growing indebtedness of the farmers and in consequence, farmers’ suicides. At the general level, it is evident that the indebtedness is on account of increasing returns and poor returns from cultivation, combined with the rising costs of meeting basic needs such as the education of children and family healthcare. An analysis of indebtedness among farmer households shows that:

 

 

• About half of farmer households were in debt and three-fifths of their debt was owed to institutional sources. Of the total debt of about Rs. 1.12 lakh crore in 2003, Rs.48,000 crore was sourced from non-institutional agencies, of which Rs.18,000 crore of debt carried an interest rate greater than 30 per cent.

   

• Further, farmers’ indebtedness was strikingly a regional phenomenon; it was low in less developed states particularly hill states and generally high in agriculturally developed states. In all states which had reported suicides among farmers, the incidence as well as debt per farmer household was high. However, sources of debt varied.
• A major share of farmers’ debt (more than 60 per cent in most of the states) was for productive purposes.

 

Farmers’ Suicides

 

 

Some aspects of farmers’ suicides which the Report mentions includes:

 

 

·         Over the last ten years, the incidence of SMR or suicide mortality rate (number of suicide deaths per 100,000 persons) in male farmers has increased considerably in relation to the SMR among male non-farmers.

 

·         During the period 2001-05, 86,922 farmers committed suicide. Of these, 54 per cent were from the four states of Andhra Pradesh, Karnataka, Kerala and Maharashtra.

 

·         Indebtedness is one of the main factors resulting in suicides, but it is not the only one. Farmers face multiple risks that reinforce each other. In addition to the weather related uncertainties, the farmer is also faced with market, technology, spurious inputs and credit related vulnerabilities.

 

 

IV. Relief and Rehabilitation Measures

 

 

The Central Government and several State governments have come up with various relief measures to aid the distressed the farmers. The Radhakrishna Committee examines these packages and provides a critique of them:

 

 

The Prime Minister’s Package

 

 

·         Announced in July 2006, it was to provide relief and rehabilitation to farmers in 31 distressed districts across four states of Andhra Pradesh, Karnataka, Kerala and Maharashtra.

 

·         Package is around 17000 crores, with around 11,000 crore as subsidy/grant and the remaining as loans to be implemented over a three year period.

 

·         The package includes a credit component, and a non-credit component which includes irrigation, watershed development, rainwater harvesting and check dams and extension services. The no-credit component aims to revive the livelihood base of the distressed farmers.

 

·         The credit component includes improved supply of institutional credit, waiving of the entire interest on overdue loans as on July 01, 2006 and provision of fresh credit by the banking system, increase in supply of credit and rescheduling of overdue loans over a period of three-to-five years with a one year moratorium.

 

 

Response of the Committee

 

 

·         The Committee feels that the package is universal in nature and does not take into account the specificities of various districts, especially since the causes of distress vary across the districts.

 

·         There has been no coordination between different agencies implementing the schemes. Further, no information is available on the impact of the scheme on the people. In addition to financial targets in the Prime Minister’s package, physical targets need to be set and monitored.

 

·         As regards the credit component, the gap in offtake of new credit indicates that the credit needs of the farmers were not assessed correctly. This needs to be assessed on the credit absorption capacity at the farm/household level. Hence, some schemes have not been designed taking into account the felt needs of the households.

 

·         Irrigation projects have been delayed due to problems in obtaining sanctions. Watershed development, construction of check dams, and rainwater harvesting has been very poor in all the states. However, progress has been made as regards horticulture development as well as provision of extension services.

 

 

V. Important Tasks Ahead in the Agricultural Sector

 

The Committee identifies a roadmap for the future to deal with both the agricultural crisis (growth and productivity) as well as the agrarian one (farmer’s distress on account of the various factors discussed above). These include:

 

·         Agriculture needs to grow at 4%; long term growth to be sustained; cropping intensity and yields must rise substantially

 

·         Additional investment in rural infrastructure, irrigation, agricultural research and extension; greater focus on rainfed areas; plan for National Rainfed Areas Authority welcome

 

·         More attention to marginal and small farmers; promotion of allied activities, development of rural non-farm sector, organisation of small and marginal farmers through collectives like Self Help Groups, etc

 

·         Improvement in R&D in the farm sector

 

·         Efforts to be made to resurrect rural credit agencies in both geographical spread as well delivery mechanisms. Need to improve institutional supply of credit as against the non-institutional supply, and to better the credit absorption capability of farmers

 

·         Need to moderate price related risks (whether they be induced due to the weather or market fluctuations) through different tariff mechanism.

 

 

VI. Recommendations of the Expert Committee

 

The Committee, after its evaluation of rural indebtedness, particularly in the 31 districts covered by the Prime Minister’s relief package, has made some short term and long term recommendations to improve the situation. They can be divided into five categories:

 

 

(1)   Short term measures to improve credit flow to farmers:

 

a.       Implementation of the Prime Minister’s Relief Package, but redesigning them according to the criticism provided by the Committee.

 

b.      Rescheduling of loans of farmers affected by natural calamities like flood and cyclones and their continued eligibility for fresh loans

 

c.       In the event of crop failure in rainfed areas, loans to be rescheduled and fresh loans to be available

 

d.      Weaning farmers away from money lenders by providing them long term loans to repay their debt to money lenders. Loans should be provided out of the “Moneylenders Debt Redemption Fund”

 

e.       Financial inclusion should be on the credit needs of small borrower households; All institutions in the rural areas to be mobilised for this purpose

 

 

(2)   Improving the financial architecture or the structure of credit delivery:

 

a.       Need to extent spread of rural banking through agency and mobile banking.

 

b.      Conversion of the Kisan Credit Card to a Bharat Kisan Card – a biometric card which includes details of land, buildings, other assets, and those of credit facilities enjoyed

 

c.       Reforming and revitalising the Lead Banking Scheme

 

d.      Credit counselling for farmers to inform them possibilities of diversification, as well as schemes. Banking institutions and SHGs play an important role in this regard

 

e.       Simplifying procedures to reduce transaction costs; Computerisation of records; Improving the quality of personnel

 

f.       NABARD should play a better role in monitoring credit delivery systems, and more effective training and guidance to banks in the rural operations.

 

g.      Ensuring priority sector lending (18% of the total credit provided).

 

h.      Improved deployment of the Rural Infrastructure Development Fund, by earmarking the entire shortfall from the target of 18% for agriculture. This can be used in the form of Rural Development Bonds, which would used be for agricultural development in the 100 most distressed districts. This will include not only the current states of Kerala, Karnataka, Andhra Pradesh and Maharashtra but also Bihar, Chattisgarh, Jharkand, Madhya Pradesh, Uttaranchal, Gujarat, Jammu and Kashmir, Orissa, Rajasthan, and Uttar Pradesh. These districts have been identified as low land productivity areas. A sum of 10,000 crore should be earmarked for this purpose.

 

 

(3)   Improving the institutional architecture: On the basis of the success of a federation of Self Help Groups in Andhra Pradesh, the Committee felt that a replication of such a model in distressed areas will be useful in providing technical support, training and market linkages.

 

 

(4)   Measures to manage various risks:

 

a.       Crop Insurance through the National Agriculture Insurance Scheme, and weather insurance schemes are beset with a number of problems. These should be investigated by a high level committee

 

b.      Setting up of a Price Risk Mitigation Fund to cover those crops not under the Minimum Support Prices

 

c.       Use of variable tariffs to reduce risks from agricultural imports

 

d.      Surveillance and advance crop assessment systems should be initiated in distressed districts using satellite imagery.

 

e.       Strengthening of research and extension services

 

 

(5)   Measures to expand livelihood base, and rural health facilities by creating opportunities for income diversification