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ARTICLE I.

FARMERS

CREDIT POLICY CRISES FOR

PROBLEM
Promoting financial inclusion among poor farmers is a high priority for Indian policymakers - for good
reason. Most rural poor are excluded from the ambit of the formal financial system, so have to rely on
local moneylenders to borrow at high rates. This causes financial distress, besides limiting their ability
to raise productivity, grow high-value crops and improve their own living standards. Ultimately, growth
in the Indian economy will depend on higher agricultural productivity. Besides raising agricultural
output and limiting food price inflation, this is necessary if workers have to transit out of agriculture to
higher-productivity occupations in manufacturing and services. - See more at:
Despite various policy attempts at priority lending to poor farmers, very little progress has been made
on the ground. Farm surveys show that access to bank loans is limited to those able to offer collateral
(land or other assets) that landless and marginal landowners do not possess. For instance, a survey of
such farmers in two districts of West Bengal during 2010 by Maitra et al. (2015) showed only 5% of
agricultural loans were from banks, 24% from cooperatives, 65% from informal lenders, and the
remaining 5% from family and friends. Bank and cooperative loans required collateral and charged
interest rates of 12% and 16% respectively. Informal loan rates were much higher at 26% but mostly
involved no collateral. Those obtaining loans from microfinance institutions (MFI) or self-help groups
(SHG) paid interest at rates closer to informal loan rates. In West Bengal these were around 25%. AllIndia figures for MFI interest rates released by the 2011 Malegam Committee range from 30-50% with
an average of 37%.
We speculate that the reason the subvention schemes are not working is that the mandated interest
rates are set too low relative to the costs that banks incur in making such loans. A similar view has
been expressed by experts such as Nachiket Mor, chair of the Reserve Bank of India (RBI) Committee
on Comprehensive Financial Services for Small Businesses and Low Income Households (Mor and
George 2014). If banks can obtain capital at a base rate of 4-5%, they incur transaction costs of the
order of at least another 4-5%. These include staff and overhead costs involved in processing loan
applications, monitoring borrowers, collecting repayments, besides allowance for bad loans. Hence, a
bank needs to charge at least 10-11% in order to break-even. If they were to make loans at the rates
mandated by the subvention law, they would lose money. Even public sector banks nowadays are
under constant bottom line pressure to maintain healthy balance sheets. Since granting loans is
ultimately at the discretion of bank officials, they end up making very few loans directly to poor
farmers. Of the few that are extended, the interest rate that is charged is large enough (while
deviating from the subvention mandates) to enable the bank to break-even.
However,as noted above, MFI loans do not come cheap: most MFIs charge interest rates ranging
between 30-50%. Such high interest rates and allegations of coercive loan collections by MFI officers
gave rise to the microfinance crisis in Andhra Pradesh (AP) a few years ago. In the wake of that crisis,
the Malegam Committee set up by the RBI investigated the structure of costs incurred by MFIs. For
loan capital they pay the banks around 12%. Staff costs and overheads amount to 14%, and
provisioning for bad loans costs 2%, amounting to a total cost of 28%. No wonder, then, that MFI
interest rates are upwards of 30%, since they have to break-even. On average they earn a profit
margin of 9-10%, so the average interest rate charged is 37%.

SOLUTION
What are the likely solutions? One route is to do away with the subvention restrictions on interest
rates that banks must charge poor farmers. Then banks would be free to set interest at rates that
cover their costs. Competition among banks, if sufficient, would eliminate efforts at rate-gouging.
Otherwise, to control interest rates, regulators could set higher ceilings on margins above costs of
capital, which would help banks recover their lending costs. Our discussions with some senior bank
officials with experience in rural lending suggest these costs would be at least of the order of 7-8%. If
banks could access priority sector funds at 5%, they ought to be able to lend profitably if allowed to
charge interest rates up to 15%.

The other alternative is to channel rural credit through non-bank intermediaries such as MFIs.
However, the most cost-efficient of these institutions incur transaction costs of the order of 7-8%. So if
they could also access priority sector funds from banks at roughly 5-6%, the rate at which the banks
access these funds, MFIs would also be able to break-even if they charged borrowers 15%. We do not
see any reason why the banks should charge market rates of 12% to MFIs, while accessing priority
sector funds at 5-6%, and pocket the difference.

Either way, policymakers have to acquire a realistic sense of the costs of delivering institutional credit
without collateral to poor borrowers, and permit interest rates of the order of 15%. This has the
potential to raise the volume of credit substantially to the rural sector, at rates still considerably below
what they are currently paying to informal lenders.

The discussion above highlights a more general issue with imposing artificial ceilings on interest rates.
These policies often lead to financial repression due to credit being rationed by lending agencies in
response. A more fruitful approach might be to give subsidies to banks to lower their cost of funds and
then cap the margins that they can charge over their subsidised cost of funds. Farmers are willing to
pay higher interest rates than the subvented rates mandated by policies. Incentivising lenders to
provide farmers with credit is key. The subventions have just tended to squeeze their access to formal
credit.

The other part of the problem is to find ways to target credit delivery to truly productive farmers, and
lend in a way that does not stifle their ability to diversify into high-value crops. BC/BFs need to be
appointed from those with experience in lending within local communities, and adequately incentivised
with commissions linked to loan repayments. Individual liability loans with loan durations matching
high-value crop cycles need to be offered. That such schemes can be successful in increasing
agricultural productivity have been shown in the West Bengal context in a field experiment by Maitra

et al. (2015). There is an urgent need for such new initiatives to ultimately realise the objective of
raising agricultural productivity and living standards in rural India.

ARTICLE II. THE CRISIS OF FARMER


SUICIDES
Way out
The way out of the vicious cycle is a combination of the following measures: public investment in rural
infrastructure (irrigation, roads), expansion of institutional credit to enable farmers to avoid being
exploited by moneylenders and middlemen, improving access to insurance products, and a
rationalisation of the wasteful and regressive subsidy raj that helps the richest farmers (who, in
addition, pay no income taxes), at the expense of the poor, to create a social safety net for smaller
farmers. But before we discuss the specifics of such policies, a first step would be to snap out of the
growth-obsession that seems to pervade our media and policy discussions.
Growth was the magic mantra that was sold to the voters in the national election last year and anyone
who questioned the obsession with growth and the neglect of other economic indicators (example,
human development measures) was brushed off as a jholawalla or an apologist for the previous
government. May be it is still early days, but unfortunately, beyond some natural corrections in tune
with global trends, and some light statistical jiggle-juggle, not much has happened on the growth
front. But I, for one, am happy not to harp on Where is the double-digit growth? to the extent this
leads to a renewed focus on the reasons why growth is potentially valuable: to improve the quality of
life of all citizens. And, taking ones own life is the most negative statement a citizen can make about
the quality of his or her own life.

ARTICLE III. PROMOTING THE USE OF A


NOVEL WATER-SAVING AGRICULTURAL
TECHNOLOGY AMONG INDIAN FARMERS
Example of laser land levelers to save water.
What are laser land levellers?
Farmers in the ricewheat system of eastern UP typically rely on rainfall or groundwater to floodirrigate their fields several times each season. But an uneven field (undulating, sloping or rutted)
makes for inefficient use of water and of the energy required to bring it to the surface. To minimise
this inefficiency, farmers traditionally level their plots using rudimentary tools, such as a wooden beam
dragged behind a tractor.

LLL uses a laser-guided drag scraper to achieve a similar result, but with much greater accuracy. LLL
can reduce the amount of water used for irrigation and improve crop establishment and growth,
thereby enhancing fertiliser efficiency, reducing weed pressure, and increasing yields (Jat et al. 2006,
2009). These benefits may endure for several years before re-levelling is required, depending on the
soil type and on cultivation and harvesting practices.
LLL may also generate important public benefits in the form of reduced depletion of groundwater,
runoff of chemical inputs, consumption of diesel fuel, and the corresponding release of greenhouse
gases. These benefits, combined with benefits to individual farmers, mean that LLL could broadly
contribute to improving social welfare.

We then considered two objectives for these strategies: (1) reducing the amount of groundwater used
for irrigation, and (2) improving the profitability and welfare of small-scale, resource-poor farmers. If
policymakers are primarily concerned about excessive extraction of groundwater, then the primary
objective of their targeting strategy should be to increase the area of land levelled by farmers using
LLL. On the other hand, if policymakers are primarily concerned about farmer welfare, the main
objective should be to increase the number of farmers using LLL.

ARTICLE IV. CRY, THE BELOVED


COUNTRY: MENDING PUNJABS
ECONOMY
Missed opportunity in Punjab
Missing the development boat
This was also a time when the country as a whole was beginning to reap the fruits of initial economic
reforms. Fortuitously, a global digital revolution was also beginning, which spurred a massive new
form of economic activity, from which India also benefited, particularly in Bangalore and other
southern locations, but also in Delhi and its environs. At this time, I investigated what was happening
with Punjabs efforts to create an information technology sector within the state. In fact, the state did
not get very far in these efforts. I found that the general environment for doing business was poor,
including insufficiently supportive government policies, as well as practices such as corruption or rentseeking that were active deterrents. I also identified a lack of adequate human capital (educated and
skilled technology workers), physical capital (telecommunications and electric power infrastructure),
and social capital (trust and positive beliefs), as barriers to Punjabs development. An important
underlying factor I saw was a tendency to be locked into backward-looking thinking about Punjab as a
Green Revolution state, with negative implications for policy priorities.
I think that by denying the broader problems of the state, by continuing to blame state-level fiscal
problems on the central government, and by not thinking clearly about what policies are needed to
support a structural transformation, the states political leadership is in danger of missing the
development boat for the third time in as many decades. What does Punjab need? First, it needs a
huge increase in scientific and technical education within the state, especially higher education. The
human capital that was adequate for the Green Revolution is completely unprepared for the Digital
Revolution that is still going strong. Second, the state needs a massive investment in digital
infrastructure. Every aspect of future economic development in any sector will depend on having this

infrastructure be first-rate. Third, Punjab needs an open and honest government, including in fiscal
policy. The state has been hurt by the fact that voters have not had good choices for their leaders. The
fact that Punjab was the only state in India where the Aam Aadmi Party (AAP) won seats in the
general election is an indicator of what the people think. Fourth, there needs to be strategic vision for
the state, and a plan for making a transition from the current Green Revolution equilibrium that has
far outlived its revolutionary status, but instead is hindering change and development. Finally, the
state needs an open and inclusive dialogue about economic policies, so that detailed reforms can be
worked out and implemented.
Is Punjab broken? Yes. How broken is it? Enough to be a major worry for its people, if not for its
leadership. But the real issue is stated clearly by Alan Paton, the author of the book from which I took
the title of my column. He wrote, The tragedy is not that things are broken. The tragedy is that things
are not mended again. Lets figure out together how to mend Punjab.

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