AGRICULTURE & FINANCE IN

RURAL SECTOR

Indian economy is basically agrarian. Nearly 70% of the Indian

population depends upon agriculture for its livelihood.

AGRICULTURE plays a crucial role in the Indian economy

and is pivotal for ensuring food security, employment generation and
social transformation of the nation. With 67 per cent of our
population and 54 per cent of the total workforce depending on
agriculture and other allied activities, agriculture not only meets the
basic needs of India’s growing population, but its direct linkages
with the industry is on the increase owing to the increased demand
for processed agricultural commodities and goods by consumers.

Agriculture in India is the means of livelihood of

almost two thirds of the work force in the
country. It has always been INDIA'S most
important economic sector. The 1970s saw a
huge increase in India's wheat production that
heralded the Green Revolution in the country. The increase in post
-independence agricultural production has been brought about by
bringing additional area under cultivation, extension of irrigation

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facilities, use of better seeds, better techniques, water management,
and plant protection. Dependence on India agricultural imports in
the early 1960s convinced planners that India's growing population,
as well as concerns about national independence, security, and
political stability, required self-sufficiency in food production. This
perception led to a program of agricultural improvement called the
Green Revolution, to a public distribution system, and to price
supports for farmers. The growth in food-grain production is a result
of concentrated efforts to increase all the Green Revolution inputs
needed for higher yields: better seed, more fertilizer, improved
irrigation, and education of farmers. Although increased irrigation
has helped to lessen year-to-year fluctuations in farm production
resulting from the vagaries of the monsoons, it has not eliminated
those fluctuations. Non-traditional crops of India, such as summer
mung (a variety of lentil, part of the pulse family), soyabeans,
peanuts, and sunflowers, were gradually gaining importance. Steps
have been taken to ensure an increase in the supply of non-chemical
fertilizers at reasonable prices. There are 53 fertilizer quality control
laboratories in the country. Realizing the importance of Indian
agricultural production for economic development, the central
Government of India has played an active role in all aspects of
agricultural development. Planning is centralized, and plan
priorities, policies, and resource allocations are decided at the central
level. Food and price policy also are decided by the central
government. Thus, although agriculture in India is constitutionally

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the responsibility of the states rather than the central government,
the latter plays a key role in formulating policy and providing
financial resources for agriculture. Expansion in crop production,
therefore, has to come almost entirely from increasing yields on
lands already in some kind of agricultural use.

The monsoons, however, play a critical role in Indian

agriculture in determining whether the harvest will be bountiful,
average, or poor in any given year. One of the objectives of
government policy in the early 1990s was to find methods of reducing
this dependence on the monsoons

In India, the Reserve Bank contributes to a great extent in the

economic development in various ways. It assumes special
responsibility in the development of agriculture & industry. The RBI
concentrates more on these two vital sectors of the economy. RBI
does not presently provide these finances directly.

RESERVE BANK OF INDIA & AGRICULTURE FINANCE

Agriculture development is regarded as a prerequisite of

economic development of the country. The Reserve Bank of India
realises the following basic contributions of the Agricultural sector in
the overall economic development.

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  Product contribution – making available food & raw
materials.

 Market contribution – providing the market for producer

goods and consumers goods produced in the non-agricultural
sector.

 Factor contribution – making available labour & capital to

non-agricultural sector, and

 Foreign exchange contribution.

Being the largest industry in the country agriculture is the

source of livelihood for over 70% of population in the country. On
recognising the fact that Agriculture is the foundation on which the
entire super structure of the growth of industrial and other sectors of
the economy has to stand, the RBI develops the Agricultural sector in
the following ways:

 Agriculture Credit Department

According to section 54 of the RBI Act, it is required to set
up a separate Agricultural Credit Department. With the formation
of NABARD in 1982, all the activities of this Department have been
transferred to NABARD. However, the Rural Planning and Credit

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Department in the Reserve Bank deals with the following agriculture
related matters.

 Funds for Agricultural Development

 Financial Assistance to Co-operative Sector
 Establishment of agricultural Credit Board
 Establishment of NABARD

 Credit Functions
A. Short-term Credit
B. Medium-term Credit
A. Long-term Credit
B. Conversion & Rescheduling Facilities
C. Financing Cottage/Village/Small Scale Industries, etc.

 Assistance to Co-operative Banks in SFDA and

MFAL
 Reform Measures for RRBs
 Promotion of Warehouse Facilities
 Other Facilities to Agriculture
 National Agricultural Insurance Scheme
 Rural Credit

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 The successive five year plans embarked upon the green
revolution and white revolution for which modernisation and
mechanisation of agriculture and allied activities was a must and
that needed financial support. As one of the measures to develop the
economy and to provide support for nation building, Bank of India
commenced rural lending wayback in 1968 even before the
nationalisation of banks. During the post nationalisation period,
spanning more than 3 decades, the Bank has grown in size and
stature with more than 2592 branches (1723 rural and semi-urban
branches) spread across the length and breadth of the country. The
Bank has been supporting the task of nation building by
implementing varied polices/guidelines of the Government with clear
objectives. As against the benchmark of 40% prescribed by Reserve
Bank of India under Priority Sector to Net Adjusted Credit, the
Bank’s achievement is consistently over 45% for the last 5 years.

The Bank has achieved business level of Rs. 16,800 crores as on

February 2005, under priority sector. Presently, the Bank has more
than 13.80 lakh borrowal accounts under Priority Sector credit fold
and there are innumerable satisfied borrowers who have come up in
life with our timely financial assistance.

Keeping in view the rich past experience and in tune with the
Government of India/Reserve Bank of India guidelines, the Bank is

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adopting innovative and growth oriented administrative policy
measures.

Focussed attention is given to build a loyal band of customers in

Rural & Semi-urban areas where the Bank has more than 67% of its
Branch Network. This has enabled development of individuals, a
village or even the given area by increased production and
productivity, through smooth flow of credit.

The Bank has, of late, launched innovative schemes/card

products with defined objectives and refined methodology. The
Philosophy, concepts and various issues behind launch of our
various new card products/schemes are as under :-

i) Intensive financing in service area with package of services to

optimally utilize the resources at the command of the borrowers,
particularly farmers and rural entrepreneurs;

ii) To maintain continued relationship with our existing

borrowers by providing credit packages which take care of both the
present as well as future aspirations of the borrowers in pursuing
their various productive ventures;

iii) Providing credit for the diversified needs of the borrower’s

family for farm, off-farm as well as consumption needs like
housing, education, conveyance, marriages, health etc;

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 iv) Recognising our good borrowers and rewarding their
loyalty by offering concessional rates of interest, better operational
flexibility in the operation of their accounts,

v) Focused attention for development of crops being grown in

the given area like Cotton, Sugarcane, Potato, Chillies, Mangoes,
Grapes, Oranges etc. Building up infrastructure for preservation and
processing these crops. Offering credit against stored farm produce
so that farmers are not forced to sell in a buyers market.

vi) Building up infrastructures at farm level through irrigation,

farm mechanisation and supportive allied activities like Dairy etc.

vii) To promote growth of industries including small artisans,

services and business sectors. For borrowers with established
credentials, the package of assistance is redefined to take care of
growth as well as seasonal credit needs without any hassles.

viii) In pursuit of achieving national objectives like better

education and housing to all, the products are re-modeled to make
them attractive with longer gestation period and lowered EMI at
affordable interest cost.

ix) The process of submission of applications for loans,

sanction, documentation and disbursements have been further
simplified.

x) Rehabilitation package for Tsunami victims.

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The various innovative schemes/card products are:

• Star Composite Cash Credit (CCC):

• Kinas Credit Card (KCC)
• Kisan Gold Card (KGC)
• Star Kisan Samadhan Card (KSC)
(CCC, KCC & KGC are now subsumed into KSC)

• Star Bhoomiheen Kisan Card (BKC);

• Star Artisan Credit Card (ACC);

Making-agriculture-attractive

With the 2003-4 budget giving agriculture the go-by, Devinder

Sharma outlines five criteria that nation's finance minister must
keep in mind while crafting budgetary policy for agriculture.

March 2003 - Successive Finance Ministers have spared no effort in

eulogizing agriculture. Presenting the Budget 2003-2004, Finance
Minister Jaswant Singh had remarked that agriculture is the life
blood of our economy. A year earlier, his predecessor, Yashwant
Sinha had romanticized agriculture, saying that his Budget was

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aimed at ensuring freedom of the farmer -- "kisan ki azadi".

It all began with the former Finance Minister Mr Manmohan

Singh, the chief architect of the new economic policy. In his famous
1992-93 Budget speech, Singh had said "Agriculture is the
foundation of national prosperity and no strategy of economic
development can succeed in our country if it does not ensure rapid
growth of production and employment in agriculture. Nor can we
hope to provide sufficient jobs for our growing rural labour force
unless we can transform the economy of our rural areas." And yet,
he concluded by saying that agriculture being in the concurrent list,
he was expecting the States to accord top priority to the farm sector.

This unfailing lip service glorifying farmers continues

unabated. And in the bargain, Indian agriculture has been
pushed into an era of unforeseen crisis - increasing suicides
among farmers, mounting rural indebtedness, unmanageable glut at
the time of harvest, swelling rural to urban migration - clear
pointers of the gathering storm clouds over the farm sector. In fact,
ever since liberalisation became the economic mantra, and the
impetus shifted to business and industry, the persistent neglect of
agriculture has cast an ominous shadow.

Since the dawn of economic liberalization in June 1991, the

annual Budget has become a political instrument to provide sops and

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tax holidays to the corporate sector, trade and industry. In essence,
Budget 2003-2004 too is targeted at India - the urban centers. What
happens to the masses - comprising the Bharat where more than 80
per cent population lives - has never been the concern of the
successive Finance Ministers. It never was.

For a country, where nearly 85-90 per cent of the 110 million
farming families, somehow eke out a living from less than 2 hectares
of land holdings, Jaswant Singh's misplaced emphasis is on
encouraging 'precision farming' to bring in hi-tech horticulture.
Interestingly, he says precision farming technology is aimed at
judicious utilization of natural resources like land, water as well as
time. "Demonstration of these technologies will also be part of this
scheme," he added, little realizing that precision farming is a highly
sophisticated and expensive model which collapsed even in United
States at the height of the worst drought (in 2002) the country faced
in recent memory.

With the World Trade Organisation (WTO) and structural

adjustment programme finally beginning to bare its fangs, the long-
term viability of agriculture and the survival of the farming
community itself is at stake. More so, at a time when Indian
agricultural is faced with a sustainability crisis - declining
productivity, falling commodity prices and sluggish exports. The
resulting political cost of continuing with the benign neglect of
agriculture and the farming sector has finally begun to surface.

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 Ressurecting agriculture should, therefore, be the obvious
challenge for any Finance Minister. Successive budgets show
emphasis, through the use of cliches like strengthening marketing
infrastructure, scientific management of scarce water resources,
empowering farmers to take informed decisions and so on. A
growing volume of evidence now clearly suggests that such jugglery
in presentation has not helped. What is needed is a fresh approach
that takes the ground realities into consideration before embarking
upon any policy imperatives.

In the rest of this article, I have made an attempt to present a

collection of five important rational decisions that would certainly
initiate the revival of Indian agriculture. All budgetary allocation for
agriculture should be made keeping these criteria for sustainable
growth in mind:

Sustainable-farming

Indian agriculture faces an unprecedented crisis in sustainability.

Foodgrain productivity in the food bowl, comprising Punjab,
Haryana, and western Uttar Pradesh, is on the decline. The green
revolution areas are encountering serious bottlenecks to growth and
productivity. Excessive mining of soil nutrients and groundwater
have already brought in soil sickness. Introducing new Centrally
Sponsored Schemes to improve production in these areas is going to
be counter-productive. Banking upon genetically engineered crops to
take care of the second-generation environmental impacts is sure to

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worsen the existing crisis. Monocultures breed pests and waste
resources.

Jaswant Singh should have made provision that encourages

sustainable and traditional farming practices. He must discourage
investments and increased outlays for agricultural research that is
based on external chemical inputs like fertiliser and pesticides (glad
that he raised the prices of fertilizers, though under pressure from
World Bank). Instead, financial allocation should be made for
reviving low-input agriculture, which uses cheap and locally
available technology and in turn improves production and protects
environment. This has been amply demonstrated in several parts of
the world. Outlays earmarked for genetic engineering in agriculture
also need to be diverted to sustainable agricultural practices.

Farm-incomes

Growing indebtedness in agriculture is forcing an increasing

numbers of farmers to end their lives. This unsavory phenomenon is
a manifestation of the declining farm incomes and lack of farm
credit. Institutional finance and credit has almost disappeared over
the years. Banks are no longer treating agriculture for priority sector
lending. Rural Banks and cooperatives are deep in the red, with a
majority of them eating into their own reserves.

Bank loans for cars are available at a much cheaper rate of

interest than tractors. The more the poverty level, the more is the

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rate of interest. Some tribals in Kalahandi in Orissa who pay 460 per
cent interest to moneylenders. In neighbouring parts of Madhya
Pradesh, the rate of interest is a little lower at 360 per cent. And in
Jharkand State, tribals pay something around 160 per cent rate of
interest. Even in the frontline agricultural States of Punjab and
Haryana, 50-60 per cent rate of interest by private moneylenders is
not very uncommon.

Agriculture credit has to be revived. Finance Minister must

spell out schemes that encourage banks to provide easy credit
facilities to farmers. Cosmetic innovations like Kisan Cards and the
likes are not much helpful unless banks have the willingness to
provide support to the agrarian sector. Asking private banks to go
rural is merely an approach that may satisfy the galleries. Similarly,
budget allocation must be made for assured food procurement at
remunerative prices. In addition, procurement needs to be extended
to coarse cereals, pulses and oilseeds to provide farmers an incentive
to produce more.

In short, agriculture has to be made attractive. Finance

Minister must ensure that the Budget allocations are made in such a
way that it helps bring back the shine on the golden grain.

Drought-proofing

Recurring drought continues to engulf vast tracts of central and

north western India. The importance of drought proofing should

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have been obvious considering that foodgrain output had slumped by
over 13 per cent in 2002-03 as a result of the severe drought that
swept through the almost the entire country. Rajasthan, for instance,
faces the fourth drought year in a row. The increased emphasis on
water harvesting notwithstanding, the reduced availability of water
is emerging as a major social and economic crisis. This is because
much of the investment is going into a faulty technology of rain water
harvesting, called the "Ridge to valley" system, a technology
imported from the United States.

Investments in rain water harvesting needs to be

immediately shifted to the revival of the traditional forms of
water conservation - ponds and tanks. Subsidies for drip
irrigation and sprinkler irrigation needs to be discontinued as it
helps only the rich farmers and corporates. Fodder cultivation, crop
planning according to the water needs and availability and the
emphasis on the local breed of cattle (and improving its productivity,
rather than importing exotic breeds) need to be encouraged.

Farmers in the rainfed areas also need to be insured against

drought. This can be ensured by making it mandatory for the foreign
insurance companies to invest at least 40 per cent of their funds for
farm insurance.

Sugar-mills

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The unprecedented addition of new sugar mills by successive
governments has created a major crisis on the agriculture front.
Requiring good fertile and irrigated land for cultivation, its growth is
at the cost of staple foods like wheat and rice. With the per hectare
productivity of foodgrains on the decline in the frontline agricultural
states, diversion of good fertile land to sugarcane is not without
accompanying hiccups. What makes the switchover to sugarcane a
pernicious trend is its enormous water requirement. Sugarcane, in
fact, is the biggest threat to India's food security.

Since there is no shortage of sugar in the country, and with a

large number of mills actually being rendered unviable over the past
two decades, an immediate ban needs to be imposed on setting up
any new sugar mill. All budgetary support to the sugar industry
needs to be withdrawn as it has led to a serious environmental crisis.

Sugarcane farmers need to be encouraged to divert to

other crops. But before diversification becomes the new
mantra, it is important to first lay out the structures that would
help in taking the produce to the consumers.

Marketing

Providing an assured and remunerative market for agricultural

producers cannot be left to the market forces. The food policy
imperatives of public distribution system and announcing the
procurement prices before the crop season have to be further

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strengthened. Agri-processing too needs to be strengthened, but not
at the cost of the domestic producers. The Finance Minister must
ensure that food-processing sector uses the abundant raw material
available within the country. The 'rainbow' revolution that everyone
talks about is actually aimed at helping the industry to exploit the
farm sector. Already a number of manufacturing units, for instance,
have begun to source the agricultural raw material, including
oranges, grapes, popcorn, peas etc, from America and Europe.

Although, India is following the WTO dictates of doing away

with the food procurement system, any tinkering with what is
generally regarded as the "famine-avoidance" strategy, can be
catastrophic. The Finance Minister needs to take corrective
measures to reduce inefficiency in the system while at the same time
making it broad-based and widespread. PDS also needs to be
extended to upcoming agricultural areas in Bihar, Orissa, West
Bengal and the northeast.

What is desperately need is an annual Budget that helps bring

back the smile on the face of farmers rather than the industrialists
who have already milked the public exchequer dry.

Devinder Sharma
March 2003

Devinder Sharma is a food and trade policy analyst. He also

chairs the New Delhi-based Forum for Biotechnology & Food

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Security. Among his recent works include two books GATT to WTO:
Seeds of Despair and In the Famine Trap

The post liberalisation era has witnessed a high degree of

correlation between India’s GDP growth and its agriculture growth,
wherein it has been estimated that for achieving the desired GDP
growth of around 8 per cent, agricultural growth in excess of 10 per
cent is required.

The impact of agricultural growth on farmer empowerment is

apparent. It has been estimated that one incremental percentage
growth in agriculture leads to an additional income generation of Rs
10,000 crore in the hands of the farmers thereby increasing their
disposable income and ultimately, their purchasing power.
Owing to diverse and favourable agro-climatic conditions, India has
a significant comparative advantage in agricultural production and
the potential to be globally competitive by producing a wide-variety
of high quality produce. These advantages if leveraged optimally, can
translate into India becoming a leading food supplier to the world.
Further, with a population of 1.08 billion, growing at about 1.6 per
cent per annum and with favourable demographics, India is a large
consumption hub for food products.

While agricultural production in the country is significant, the agro

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processing industry is still at a nascent stage with less than 2 per cent
of the fruit and vegetables production being processed as compared
to about 80 per cent in Malaysia, 30 per cent in Thailand and 60-70
per cent in United Kingdom and United States of America. The
growth of the Indian food processing industry has been sub-optimal
due to the prevalence of several aspects that have hindered fullest
realisation of the immense potential. In terms of agricultural trade,
India has a 1.3 per cent (Rs 33,000 crore in 2002-03) share of global
food & agricultural trade ($460 billion), despite its production
leadership in agriculture. India’s exports still constitute the low-
value commodity and primary processed items where price
realisations are low. In addition, many products are showing single
digit or negative growth.

The reasons for India’s insignificant share in global trade include

supply side factors such as lack of consistency in supply and quality,
lack of cost competitiveness, and demand side factors such as non-
tariff barriers and poor perception of Indian food products in the
international markets.

Issues and challenges

Indian agriculture sector has the potential to transform India

into the leading agro economy of the world. However, a holistic and
integrated approach is required to achieve sustainable development
of the sector. Such efforts so far have largely remained fragmented

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and confined to limited areas.

One of the major constraints hindering the progress of Indian

agribusiness is lack of supply chain integration wherein different
stakeholders (viz farmers, agri-input players, processors and
retailers) have been operating in isolation. This lack of integration
has created bottlenecks at each stage thereby creating mismatches in
the demand-supply situation. Farmers suffer from lack of linkages to
the demand side as they are unaware on the kind of crop varieties
which have high demand potential. Similarly, the agri-input players
such as seed companies, agrochemical suppliers are not linked to the
demand side to understand the processable or marketable varieties
of seeds and inputs to be supplied.

From the demand side the agro-processing industry also suffers due
to the lack of backward integration. Interaction between agro-
processing industry and input players and farmers on the precise
nature of inputs required for processing commodities is limited. This
has deprived the agro processing industry from capitalising on
potential economies of scale and from achieving a degree of
procurement comfort based on produce quality.

The problem of isolated operation of stakeholders which is further

compounded by the lack of adequate infrastructure (such as silos,
warehousing and storage facilities) and ad-mixture problems as well

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as non existence of value-added service provision is ultimately
leading to the erosion of the competitive edge of Indian agribusiness.

Integrated supply chain solutions are the key to achieving

sustainable development of the food processing sector in India.
Specialised financial institutions with domiciled expertise in
agribusiness are fully equipped to provide these solutions with
orientation towards their technical and financial sustainability.
Moreover, although the technological (IT) and managerial
revolutions in India have transformed the face of the urban and
industrial India, the benefits of the same have continually eluded the
Indian agriculture sector. Non and untimely availability of quality
inputs like seed, fertiliser, and plant protection chemicals is often felt
by farmers and is critical for successful production of value added
crops. Poor infrastructure like roads, power, supply, port, storage,
processing, marketing and the value addition problems are
significant. Yet another hindrance relates to unfavourable farm
policies on farm size, customised technologies, subsidies, domestic
marketing, international trade, credit insurance, food laws, entry of
private sector, co-operatives etc.

The way forward

Over the years, the role of the banking community in fueling

agriculture growth has been limited. Till date, banks have largely
ventured into the agriculture sector only to fulfill their priority

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sector obligations. In fact, many banks have taken softer options
such as investing in the Rural Infrastructure Development Fund
(RIDF) instead of directly lending to the farmers. Bankers’
reluctance to finance the agriculture sector stems from the fact that
there is a dearth of bankable projects in the sector presently. The
resultant lack of institutional financing options has forced the
farmers to avail funding from money lenders at exorbitant rates of
interest. Structured project development in the micro/rural sector is
the key factor that can help India realise its true food and
agribusiness potential and also sustainable farmer empowerment
and rural entrepreneurship. In fact, adopting a projectable approach
in the micro sector will lead to the development of agribusiness in the
country.

A paradigm shift is required in the outlook to agriculture;

production to marketing orientation and from a quantity to quality
focus. A scientific and innovative agricultural approach to
agriculture will enable us to compete globally in cost and quality
with respect to global benchmarking and our core competitive
strengths in various agriculture produces.

Finally, the need imposed and expressed by agriculture and rural

sector through recent electoral mandate clearly reflect need for
urgent intervention in the sector. While immediate efforts by
government towards increasing financial assistance in the sector are

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necessary, there is a pressing need for the banking community to
ensure that government support to rural and agriculture sector gets
leveraged multifold, and ensures empowerment of rural India by
enabling entrepreneurship in them, leading to our country emerging
as a sustainable economic superpower. Adopting a knowledge-based
approach to develop risk mitigating and innovative project financing
structures is a key requirement for enhanced financing of the sector
which will ultimately result in increased commercial viability and
ensure sustainable development of Indian agriculture.

Rural banking in India started since the establishment of

banking sector in India. Rural Banks in those days mainly focussed
upon the agro sector. Regional rural banks in India penetrated every
corner of the country and extended a helping hand in the growth
process of the country.

SBI has 30 Regional Rural Banks in India known as RRBs. The rural
banks of SBI is spread in 13 states extending from Kashmir to
Karnataka and Himachal Pradesh to North East. The total number
of SBIs Regional Rural Banks in India branches is 2349 (16%). Till
date in rural banking in India, there are 14,475 rural banks in the
country of which 2126 (91%) are located in remote rural areas.

Apart from SBI, there are other few banks which functions for the

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development of the rural areas in India. Few of them are as follows.

Haryana State Cooperative Apex Bank Limited

The Haryana State Cooperative Apex Bank Ltd. commonly called as

HARCOBANK plays a vital role in rural banking in the economy of
Haryana State and has been providing aids and financing farmers,
rural artisans, agricultural labourers, entrepreneurs, etc. in the state
and giving service to its depositors.

NABARD

National Bank for Agriculture and Rural Development (NABARD)

is a development bank in the sector of Regional Rural Banks in
India. It provides and regulates credit and gives service for the
promotion and development of rural sectors mainly agriculture,
small scale industries, cottage and village industries, handicrafts. It
also finance rural crafts and other allied rural economic activities to
promote integrated rural development. It helps in securing rural
prosperity and its connected matters.

Sindhanur Urban Souharda Co-operative Bank

Sindhanur Urban Souharda Co-operative Bank, popularly known as

SUCO BANK is the first of its kind in rural banks of India. The

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impressive story of its inception is interesting and inspiring for all
the youth of this country.

United Bank of India

United Bank of India (UBI) also plays an important role in regional

rural banks. It has expanded its branch network in a big way to
actively participate in the developmental of the rural and semi-urban
areas in conformity with the objectives of nationalisation.

Syndicate Bank

Syndicate Bank was firmly rooted in rural India as rural banking

and have a clear vision of future India by understanding the
grassroot realities. Its progress has been abreast of the phase of
progressive banking in India especially in rural bank

Fiscal Administration

Historically, the Indian government has pursued a cautious

policy with regard to financing budgets, allowing only small amounts
of deficit spending. Budget deficits increased in the late 1980s, and
the necessity of financing these deficits from foreign borrowing
contributed to the 1990 balance of payments crisis. The central
government budget deficit reached 8.4 percent of GDP in FY 1990,

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up from 2.6 percent in FY 1970, 5.9 percent in FY 1980, and 7.8
percent in FY 1989. The deficit was cut to 5.9 percent in FY 1991 and
5.2 percent in FY 1992, but widened to 7.4 percent in FY 1993. It was
expected to recede to 6.2 percent in FY 1995.
The central government's budget deficits during the 1980s
increased the total public debt rapidly until in FY 1991 it stood at
Rs3.9 trillion. The bulk of this debt was owed to citizens and
domestic institutions and firms, particularly the central bank.
Readers of Indian monetary statistics should be alert to the use of the
terms lakh (see Glossary) and crore (see Glossary), which are used to
express higher numbers.

India Monetary Process

The basic elements of the financial system were established

during British rule (1757-1947). The national currency, the rupee,
had long been used domestically before independence and even
circulated abroad, for example, in the Persian Gulf region. Foreign
banks, mainly British and including some from such other parts of
the empire as Hong Kong, provided banking and other services. The
Reserve Bank of India was formed in 1935 as a private bank, but it
also carried out some central bank functions. This colonial banking
system, however, was geared to foreign trade and short-term loans.
Banking was concentrated in the major port cities.
The Reserve Bank was nationalized on January 1, 1949, and
given broader powers. It was the bank of issue for all rupee notes

26
higher than the one-rupee denomination; the agent of the Ministry of
Finance in controlling foreign exchange; and the banker to the
central and state governments, commercial banks, state cooperative
banks, and other financial institutions. The Reserve Bank
formulated and administered monetary policy to promote stable
prices and higher production. It was given increasing responsibilities
for the development of banking and credit and to coordinate banking
and credit with the five-year plans. The Reserve Bank had a number
of tools with which to affect commercial bank credit.
After independence the government sought to adapt the
banking system to promote development and formed a number of
specialized institutions to provide credit to industry, agriculture, and
small businesses. Banking penetrated rural areas, and agricultural
and industrial credit cooperatives were promoted. Deposit insurance
and a system of postal savings banks and offices fostered use by
small savers. Subsidized credit was provided to particular groups or
activities considered in need and which deserved such help. A credit
guarantee corporation covered loans by commercial banks to small
traders, transport operators, self-employed persons, and other
borrowers not otherwise effectively covered by major institutions.
The system effectively reached all kinds of savers and provided
credit to many different customers.
The government nationalized fourteen major private
commercial banks in 1969 and six more in 1980. Nationalization
forced commercial banks increasingly to meet the credit

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requirements of the weaker sections of the nation and to eliminate
monopolization by vested interests of large industry, trade, and
agriculture.
The banking system in India expanded rapidly after
nationalization. The number of bank branches, for instance,
increased from about 7,000 in 1969 to more than 60,000 in 1994, two-
thirds of which were in rural areas. The deposit base rose from Rs50
billion in 1969 to around Rs3.5 trillion in 1994. Nevertheless,
currency accounted for well over 50 percent of all the money supply
circulating among the public. In 1992 the nationalized banks held 93
percent of all deposits.
In FY 1990, twenty-three foreign banks operated in India. The
most important were ANZ Grindlays Bank, Citibank, the Hongkong
and Shanghai Banking Corporation, and Standard Chartered Bank.
Public-sector banks in India are required to reserve their
lending based on 40 percent of their deposits for priority sectors,
especially agriculture, at favorable rates. In addition, 35 percent of
their deposits have to be held in liquid form to satisfy statutory
liquidity requirements, and 15 percent are needed to meet the cash
reserve requirements of the Reserve Bank. Both these percentages
represent an easing of earlier requirements, but only a small
proportion of public-sector banks' resources can be deployed freely.
In late 1994, the rate of interest on bank loans was deregulated, but
deposit rates were still subject to ceilings.

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 More than 50 percent of bank lending is to the government
sector. With the onset of economic reform, India's banks were
experiencing major financial losses as the result of low productivity,
bad loans, and poor capitalization. Seeking to stabilize the banking
industry, the Reserve Bank of India developed new reporting
formats and has initiated takeovers and mergers of smaller banks
that were operating with financial losses.
India has a rapidly expanding stock market that in 1993 listed
around 5,000 companies in fourteen stock exchanges, although only
the stocks of about 400 of these companies were actively traded.
Financial institutions and government bodies controlled an estimated
45 percent of all listed capital. In April 1992, the Bombay stock
market, the nation's largest with a market capital of US$65.1 billion,
collapsed, in part because of revelations about financial malpractice
amounting to US$2 billion. Afterward, the Securities and Exchange
Board of India, the government's capital market regulator,
implemented reforms designed to strengthen investor confidence in
the stock market. In the mid-1990s, foreign institutional investors
took greater interest than ever before in the Indian stock markets,
investing around US$2 billion in FY 1993 alone.
Despite increases in energy costs and other pressures from the
world economy, for most of the period since independence India has
not experienced severe inflation. The underlying average rate of
inflation, however, has tended to rise. Consumer prices rose at an

29
annual average of 2.1 percent in the 1950s, 6.3 percent in the 1960s,
7.8 percent in the 1970s, and 8.5 percent in the 1980s.
Three factors lay behind India's relative price stability. First,
the government has intervened, either directly or indirectly, to keep
stable the price of certain staples, including wheat, rice, cloth, and
sugar. Second, monetary regulation has restricted growth in the
money supply. Third, the overall influence of the labor unions on
wages has been small because of the weakness of the unions in
India's labor surplus economy.

India Story Just Got Better

Within a week (31 Dec.-7 Jan), the UPA Government has revised the
GDP growth estimates for both, the previous fiscal as well as for the
current year. The FY04 estimate was raised from an already
impressive 8.2% to an even better 8.5%, and the forecast for FY05
was raised from 6-6.5% to 6.9%. The improved performance for the
previous fiscal is not surprising, as it was on a low base, and a
bumper harvest. But, to have an economy grow at nearly 7% on an
extremely high base is just superb. What makes the upward revision
in the current fiscal’s growth projection even better is that the farm
output this year will be much lower than last year’s production.
Agriculture growth this year will shrink to a negligible 1.1% versus a
solid 9.6% in the previous fiscal. Still, the overall impact on the

30
economy will be much lower, thanks largely to the robustness in
industrial and services sectors. This is quite a departure from the
past, when a significant drop in farm output invariably led to an
equally big decline in the manufacturing growth in that year and in
the following one. In the decades before the 1990s, total GDP would
actually fall on account of poor agricultural growth. That this
negative trend has been reversed is definitely a welcome sign for the
Indian economy.

The last time the Indian economy went through such a purple
patch was in the investment-led boom of the mid-1990s. The latest
data too suggests that the ongoing buoyancy in the Indian economy is
driven by greater investment. One statistic that puts this in
perspective is the growth in the manufacturing sector. It is projected
to expand by 8.9% in the year 2004-05, as against a healthy growth
of 6.9% in the previous year. Between April-November 2004-05, the
Index of Industrial Production (IIP) grew by 8.4% compared with
6.4% in the year-ago period. In October, it grew by as much as 10%.
Manufacturing was up a whopping 11.3% in October. Whatever
slowdown is being witnessed in the IIP is due to lower growth in
mining and construction sectors. What this data indicates is that
domestic demand is now less dependent on agriculture, whose
fortunes are still tied with the southwest monsoon. The Indian
economy has become considerably resilient, and can sustain a growth
rate of at least 7% without much help from the rain gods.

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 Another side of the Indian economy that looks to be on a roll is
the services industry. It now accounts for over 50% of the GDP, and
has emerged as the major source of employment generation.
Financing, insurance, real estate & business services is likely to grow
by 7.1%, unchanged from the previous fiscal year. Trade, hotels,
transport & communications sector is expected to clock a growth
rate of 11.3%, a tad lower than 11.8% last year. The role of services
has assumed a lot of significance even as that of the agriculture has
diminished considerably. Together with the industrial sector, the
services have become a major driving force for the Indian economy.
With both of them doing extremely well and no signs of any big
hiccups on the horizon, one can concur that India can maintain a
growth rate of around 7%.

That is not to suggest that agriculture is not important for the

economy. Though agriculture now comprises just about a quarter of
India’s GDP, it provides employment to some 70% of its population.
All the more reason for the Government to come up with sound
policies that will ensure stable and sustainable growth in the farm
sector, irrespective of how bad the monsoon is. In light of this, the
National Common Minimum Programme (NCMP) devised by the
Congress-led regime seems to have its heart at the right place. It calls
for large-scale investment in the rural sector and has already
committed to boosting credit to the farm sector. Due to time
constraint, Finance Minister P. Chidambaram could not implement
the NCMP agenda for the rural sector in its entirety. But, he is

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expected to announce a series of measures in the upcoming budget to
give a major fillip to the rural sector. The success of these steps will
be crucial for achieving a higher GDP growth rate over a sustainable
period of time. That's when India will be really shining.
Hemant P. Maradia

Crop Insurance History: In our country crop production has been

subjected to the vagaries of the climate. Some of the other problems
that the Indian agriculture is constantly tackling with are the large-
scale damages that are caused as a result of the attack of pests and
diseases. It is in a scenario such as this in India that the issue of crop
insurance assumes a vital role in the stable growth of the
agricultural sector. Tracing the Crop Insurance History in India we
see that it was started with the introduction of the All-Risk
Comprehensive Crop Insurance Scheme (CCIS) that covered the
major crops. This scheme was introduced in 1985. In fact this period
of introduction also coincided with the introduction of the Seventh-
Five-year plan. This initial scheme was of course later substituted
and replaced by the National Agricultural Insurance Scheme. This
substitution came into effect from 1999. These Schemes that have
been introduced throughout the crop insurance history have been
preceded by years of preparation, studies, planning, experiments
and trials on a pilot basis.
In the crop insurance history, the question of introducing a crop
insurance scheme was taken up for examination soon after the
Indian independence. The first aspect that was examined related to

33
the modalities of crop insurance. The issue under consideration was
about whether the crop insurance should be offered under an
Individual approach or on Homogenous area approach.

The Individual approach of the scheme indemnifies the farmer to the

full extent of the losses. Also the premium that is to be paid by him is
determined with reference to his own past yield and loss experience.
The Individual approach for these schemes necessitates reliable and
accurate data of crop yields of individual farmers for a sufficiently
long period, for fixation of premium on actuarially sound basis.

The Homogenous area approach on the other hand was aimed at

envisaging a homogeneous area from the point of view of crop
production and similarity of annual variability of crop production.
The homogenous area approach was found to be more favorable.
This is because it would facilitate the provision of a single unit
treatment to various agro-climatically homogenous areas and the
individual farmers and allow them to pay the same rate of premium
and receive the same benefits, irrespective of their individual
fortunes.

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Crop Insurance Risks covered:

The Crop insurance schemes aim at providing comprehensive risk

insurance which cover the yield losses that occur to the
agricultural output of small and marginal farmers due to non
preventable risks. The crop insurance risks covered under the
non-preventable category are listed below:

a. Natural Fire and Lightning

b. Storm, Hailstorm, Cyclone, Typhoon, Tempest, Hurricane,
Tornado etc.
c. Flood, Inundation and Landslide
d. Drought, Dry spells
e. Pests/ Diseases etc.

The crops insurance risks does not cover any of the losses that arise
out of war and nuclear risks, malicious damage and other risks
which are preventable risks.

The sum insured under the crop insurance risks covered usually
extends to the value of the threshold yield of the insured crop.
This is usually subject to the option of the insured farmers.
Nevertheless, a farmer may also choose to insure his crop beyond
value of the threshold yield level up to 150% of average yield of
the notified area on payment of premium at commercial rates.

Apart from the risks covered in the crop insurance scheme, what
is important is the sum insured. In case of Loanee farmers the
sum insured would be at least equal to the amount of crop loan

35
 advanced. Further, in the case of the Loanee farmers, the
insurance charges that will be levied will be additional to the Scale
of Finance for the purpose of obtaining loan.

Apart from the above mentioned issues, the matters of Crop Loan
disbursement procedures, which have been outlined by the RBI /
NABARD are binding. The insurance premium issues still stand at
an undecided state as the transition to the actuarial regime in case
of cereals, millets, pulses & oilseeds is expected to be made in a
period of five years.

Crop Insurance Schemes in India:

In order to provide a boost to the agriculture in India, a number of

experimental crop insurance schemes have been introduced in the
country. The first ones of the experimental crop insurance schemes has
been a Pilot Crop Insurance scheme. This was introduced by GIC from
the year 1979.

Some of the important features of the scheme were that the scheme was
based on "Area Approach". This scheme covered crops such as Cereals,
Millets, Oilseeds, Cotton, Potato and Gram. The scheme was confined to
loanee farmers only and on voluntary basis. The risk was shared
between General Insurance Corporation of India and State

36
Governments in the ratio of 2:1. The maximum sum that could be
insured under the scheme was 100% of the crop loan, which was later
increased to 150%.
Under this scheme, 50% of the subsidy was provided for insurance
charges which was payable to the small / marginal farmers by the State
Government & the Government of India on 50:50 basis.
Among the earlier crop insurance schemes that were introduced was a
comprehensive Crop Insurance Scheme. The Government of India
introduced the Comprehensive Crop Insurance Scheme with effect from
1st April 1985. This scheme was introduced with the active participation
of State Governments. The Scheme was optional for the State
Governments.

This Scheme was linked to the short-term crop credit that was extended
to the farmers and was implemented using the Homogeneous Area
approach. The number of states that were covered under the scheme
were 15 States and the number of UTs that were included were 2. This
Scheme was implemented until Kharif 1999. Some of the important
features of this scheme allowed a cover to the farmers availing crop
loans from Financial Institutions for growing food crops & oilseeds on
compulsory basis. The coverage under this scheme was restricted to
100% of crop loan subject to a maximum of Rs. 10,000/- per farmer.
The premium rates for Cereals and Millets were 2% and for Pulses and
Oil seeds 5%.
The premium and risk claims were shared in a ratio of 2:1 by the

37
central and state Government. The Scheme was optional to State
Governments.

Rural banking in India started since the establishment of banking

sector in India. Rural Banks in those days mainly focussed upon the
agro sector. Regional rural banks in India penetrated every corner of
the country and extended a helping hand in the growth process of the
country.

SBI has 30 Regional Rural Banks in India known as RRBs. The rural
banks of SBI is spread in 13 states extending from Kashmir to
Karnataka and Himachal Pradesh to North East. The total number of
SBIs Regional Rural Banks in India branches is 2349 (16%). Till date in
rural banking in India, there are 14,475 rural banks in the country of
which 2126 (91%) are located in remote rural areas.

Apart from SBI, there are other few banks which functions for the
development of the rural areas in India. Few of them are as follows.

Haryana State Cooperative Apex Bank Limited

The Haryana State Cooperative Apex Bank Ltd. commonly called as

HARCOBANK plays a vital role in rural banking in the economy of
Haryana State and has been providing aids and financing farmers, rural
artisans, agricultural labourers, entrepreneurs, etc. in the state and
giving service to its depositors.

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NABARD

National Bank for Agriculture and Rural Development (NABARD) is a

development bank in the sector of Regional Rural Banks in India. It
provides and regulates credit and gives service for the promotion and
development of rural sectors mainly agriculture, small scale industries,
cottage and village industries, handicrafts. It also finance rural crafts
and other allied rural economic activities to promote integrated rural
development. It helps in securing rural prosperity and its connected
matters.

Sindhanur Urban Souharda Co-operative Bank

Sindhanur Urban Souharda Co-operative Bank, popularly known as

SUCO BANK is the first of its kind in rural banks of India. The
impressive story of its inception is interesting and inspiring for all the
youth of this country.

United Bank of India

United Bank of India (UBI) also plays an important role in regional

rural banks. It has expanded its branch network in a big way to actively
participate in the developmental of the rural and semi-urban areas in
conformity with the objectives of nationalisation.

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Syndicate Bank

Syndicate Bank was firmly rooted in rural India as rural banking and
have a clear vision of future India by understanding the grassroot
realities. Its progress has been abreast of the phase of progressive
banking in India especially in rural banks.

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