Agricultural growth performance and institutional credit

South Asia Monitor, July 27, 2015
By Dr. Ram Kumar Jha

The growth of gross value added at 2011-12 basic prices for agriculture and allied sectors, industrial sector and services sector has been estimated at 1.1 percent, 5.9 percent and 10.6 percent respectively in 2014-15, as compared to 3.7 percent, 4.5 percent and 9.1 percent, respectively in 2013-14. The Ministry of Finance, India has projected the annual growth rate of the Indian economy at 7.3 percent in 2014-15 as compared with 6.9 percent in the 2013-14. Yet the decline in the growth of agriculture and allied sector is a cause of concern.

India’s 12th National Development Plan (2012-2017) also emphasizes the need to reverse the recent economic slowdown and make growth more inclusive and sustainable. The target of achieving an overall growth for agriculture and allied sector of 4 percent is under suspense due to various reasons. The contribution of agriculture and allied sector to the Gross Domestic Product (GDP) has fallen from 61 percent in 1947 to 19 percent in 2014. It should be noted that agriculture supports 58 percent of the population in 2014, as against about 75 percent in 1947.

Agriculture is weather dependant and uneven weather conditions hinder agricultural productivity. Last year there was 11.9 percent deficit rainfall. And the result was a reduction in grain output by 3 percent. As per the 3rd advance estimates released by Ministry of Agriculture released in May 2015, production of total food grains during 2014-15 is estimated at 251.1 million tonnes compared to 265.6 million tonnes in 2013-14 and 257.1 million tonnes in 2012-13 respectively.

This could reduce agricultural production by 4 percent. A 4 percent decline in agricultural production could cut 0.6 to 0.7 percent in the overall growth rate. Such a decline could bring the overall GDP growth rate down below the 7 percent. Slower agriculture growth could hamper overall economic growth despite robust rise in services or manufacturing sectors.

Several industries in India receive their raw material from agriculture and allied sector; for example cotton, jute, textile, sugar, vanaspati, etc. Handlooms, spinning, oil milling, rice milling etc. are various small scale industries, which are also heavily dependent on agriculture sector. India’s foreign trade is also deeply associated with agriculture and allied sector. Agriculture and allied accounts for about 14.7 percent of the total export earnings. Inadequate production of pulses and oilseeds has resulted in increase in import of these commodities. Thus a decline in agricultural production would affect the economy by increasing imports and reducing export potential.

The poor growth rate in agricultural sector owes to lack of public investments in creating infrastructure. In a country where rainfed agriculture contributes to 60 percent of the net sown area, investment in irrigation sector was negligible in the past decade. Similar is the case of rural infrastructure development, which includes roads, electricity, markets, warehouses and cold storages. It is this rainfed region which sustains the livelihoods of small and marginal farmers and is vulnerable to weather aberrations. More than 85 percent of the capital formation in agriculture comes from the private sector, bulk of which is from households rather than corporates. That said the significance of credit services to small and marginal farmers cannot be overlooked as it enables farmers to buy inputs, tools and equipment and machinery for agricultural activities.

The Government of India has since 2006-07 been subsidizing short term crop loans to farmers upto Rs.3 lakhs at 7 percent per annum through interest subvention with the help of banking sector. During 2014-15, besides 2 percent interest subvention, an additional 3 percent subvention is given for prompt repayment of loan, thus reducing the effective rate of interest for such farmers to 4 percent. There is also an argument that the interest subvention has distorted the price of credit and led to misuse of loans for non-productive purposes. Of the total agricultural credit, the share of investment credit has been diminishing which has direct implications in agricultural asset creation.

In the budget 2014-15, the government has taken a number of steps to enhance the growth rate of agriculture sector. These include enhanced institutional credit to farmers, promotion of scientific warehousing infrastructure, including cold storages and cold chains, improved access to irrigation through Pradhan Mantri Krishi Sichayee Yojana, provision of Price Stabilisation Fund to mitigate price volatility in agricultural produce, mission mode scheme for Soil Health Card to enhance nutrient use efficiency, setting up of Agri-tech Infrastructure fund, provide institutional finance to joint farming groups of ‘Bhoomi Heen Kisan’ through NABARD etc.

A target of Rs.8.5 lakh crore has been set for agricultural credit during the year 2015-16. Corpus of Rural Infrastructure Development Fund has been raised by additional Rs.5,000 crores to Rs.25,000 crores, and Rs.5,000 crores has been provided for the Warehouse Infrastructure Fund.

The current budget reflects a favourable policy approach and budget allocation by the government to increase investment credit to facilitate capital formation within the sector. But these efforts are not enough. With the advent of climate change, there is a need to strengthen agricultural research and extension services to equip the farming community with adaptation strategies to minimise the risks. Bringing more area under irrigation, efficient use of water resources, crop diversification, increased mechanization, development of value added market chains all are inevitable components to sustain agricultural growth rate.

(Ram Kumar Jha is working as Policy Analyst, CUTS International, Jaipur. He can be contacted at

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