Getting the Problem Right
In terms of the age-old problem of helping farmers increase their productivity and income, I don’t think agricultural credit and finance are the right problems to focus on. I make this statement cautiously--but based on the observations of an on-going CMF study in 4 states, farmers (small, medium, and large) are able to access crop-loans through banks or co-operatives with relative ease. The penetration and coverage of such formal credit sources is quite high based on district-level data. Loan appropriateness is also not necessarily the issue. Amounts for crop-loans are fixed by a technical committee through a ‘scale-of-finance’ framework, based on i) amount of land owned by the farmer and ii) the type of crop grown. Loans are also released on a timely basis
So why does the debate around helping farmers always focus on credit? Even with access to credit, the small farmer still suffers from an absolute income deficit where he cannot compensate for major expenses, risks undertaken, or regular household expenditures incurred throughout the year. Crop-loans are sometimes diverted for consumption purposes, and informal loans become necessary to repay these loans or absorb other household and farm costs.
A debate focused on credit also encourages policies targeting credit. A reduction in loan interest is not sufficient for a farmer to expand his area of cultivation or invest better in his crop for a more secure income. And a loan waiver may temporarily relieve a farmer after a bad crop but does not make up for the investments already made.
As one farmer explained, 'It’s simple--if we got a good price for the money and labor we put in, then everything would be fine and people wouldn’t be leaving for other jobs’ Are credit schemes and financial instruments the best way to improve an unprofitable sector? Or is it a superficial and easier fix to the problem, compared to the alternatives?
Financial services are definitely essential but there is a disproportionate amount of attention and resources devoted to this area. Other initiatives looking at improving farmer yields and incomes are saturated with buzz words: adoption of technology, value addition, market linkages, etc. For example, better techniques of spacing, input application, and water-management have been documented to raise yields up to 30% at minimal cost. A combination of access to storage facilities and collective bargaining has been documented to double the net income for a small farmer.
However, it is difficult to generalize these results. I’m not sure there is a clear understanding of these terms- what has an impact, for which type of crop, for which type of farmer, in which area, and in which market environment. These are all much harder questions to answer, but I think they’re more worthwhile to ask to help farmers in the long-term.