1 Chapter I Introduction, Review of Literature And
Total Page:16
File Type:pdf, Size:1020Kb
CHAPTER I INTRODUCTION, REVIEW OF LITERATURE AND CONCEPTS Agriculture in India has always been a way of life, rather than a business and has suffered from stagnation due to low productivity arising from inadequate investment. Low investment is caused by low farm income, which follows in turns from low resource productivity completing the vicious circle. To break-through this problem and to bring an upward movement is by the way of increasing capital investment. An initial push which has been characterized as “Big Push” by “Rodden stein-Rodan” “Critical Minimum effort by Leibenstein, Bottleneck breaking” by Ragnar Nurkse, Linkage effects by Hirschman all are conveying that a need for giving greater attention to capital investment. In 1951 census 82.7 percent of the population of the country lived in rural areas it has declined to 72.2 percent in 2001 census. The share of the rural population in the total population was declining at the rate of hardly two percent per decade. Dependence on agriculture for livelihood in the rural areas is 73.3 percent during 2001 census (Vyas V.S. 2007). Agriculture contributes almost 28 percent of India‟s GDP per year. In the era of planned economic growth of India with GDP growth rate of 8 percent per year, more than 32 percent of population is living below the poverty line. The rate of growth of employment in agriculture sector has declined from 2.57 percent in 1987-88 to 1993-94 to 0.02 percent in 1993-94 to 1999-00. The emergence of green revolution in India by the late sixties has changed the character of Indian agriculture. There was a growing tendency among the farmers to replace the traditional farming practices with scientific and modern practices, which is reflected by the use of HYV seeds, fertilizers, pesticides, irrigation, machinery and equipment etc. These inputs require heavy financial investments, which the majority of the farmers cannot afford from their own savings. Because they are suffer from indebtedness. According to NSSO indebtedness is highest in Andhra Pradesh (82 percent) followed by Tamil Nadu (74.5 percent) Punjab (65.4 percent) Kerala (64.4 percent) Karnataka (61.6 percent) and Maharashtra (54.8 percent). So the farmers therefore have to depend to a large extent on borrowed funds. This has naturally increased the demand for credit of a large number of farmers. 1 Statement of the Problem Indian agriculture is in a state of serious crisis” and the rate of growth in food production had fallen below the population growth rate. “Over 400 million children, women and men belonging to families with small and marginal holdings and landless labour families are in deep distress”. The investment in agriculture has stagnated at 13 percent of the Gross National Product in the last three five-year plans” (Swaminathan M.S. 2005). The annual average farm growth rate has declined from 4.9 percent in the eighth plan to 1.3 percent in the 10th plan. The share of agriculture investment in Gross Domestic Product (GDP) declined from 1.99 percent in the eighth plan to 1.66 percent in the 10th plan. In spite of the low interest the poor borrowers do not rely on banks or in spite of charging higher interest the moneylenders are still dominating the rural credit market, why? To answer these questions, economist like George Stieglitz (1995) developed a theory of asymmetry of information in which he argued that the formal credit still remain unreachable and replace the role of informal credit markets in rural areas due to the lack of information or imperfect information about the individual borrowers in the rural areas particularly the poor. The village money lender by virtue of small area of operation, are able to gather full or perfect information about the individual borrowers particularly the poor borrowers including the honesty of the person, his background, his heirs, his capacity to repay, in this absence the borrow who will be bearing the repayment etc. It is equally risky that the money lenders lend even to strangers without any collateral security and in the event of default he may lose the money. Informal credit accounts for all these and charges a higher interest. This is highly impossible for the formal bank to have all these information and even if it is produced in the application form, it is highly doubt full and difficult to cross check whether the borrower is giving the real and true information, or the lack of knowledge about the poor small borrowers, which make the banks remain unreachable the poor borrowers. Another important problem is financial institutions the delivery of credit to agriculture is neither smooth nor adequate (Veerashekarappa, 1994). There exists a substantial gap between the demand for and supply of agricultural credit (Kaliyaperumal and Loganathan, 1989). The same idea has been reviewed by Benson Kunjukunju and Mohanan and they also found out region-wise, institution sector-wise and scheme-wise credit gap. There is also a wide gap between the application of loan and sanction of loan (Benson Kunjukunju and Mohanan, 2003). So, the farmers borrow money from the informal 2 sources. In the less developed regions, the small farmers highly depend on informal sources (Dandekar and Wadia, 1989). The same view has been expressed by Kaliyaperumal and Loganathan (1989), but Ramachandran Pillai (2003) has stated that not only small farmers, marginal farmers also depend on such traditional sources of funds because they do not have the collateral to obtain institutional loans and timely credit is not available to the farmers. Veerashekarappa, 1996 also stated that timely credit often needs political intervention. Another problem is distribution of formal sector credit is also unequal with regard to region, class, caste and gender (Ramachandran and Madhura Swaminathan, 2002). And uneven distribution of credit existed not only between states, but also between different economic sectors and noted that bank credit was virtually non-available to small borrowers and weaker sections (Rais Ahmad, 1998). Credit institutions are unequally distributed across the region and accessibility to timely credit depends often on political intervention (Veerashekharappa, 1996). Inequalities exist in the spread of credit, across the regions (Nair, 1999) and across landholding (Gadgil, 1986). The inequalities in the banking system across the regions and social classes persisted (Bell, 1990). This was because of the insistence on collateral (Sarap, 1991) which could not be provided by the poor, complicated administration procedures, long distances from the villages to the branches, the cultural gap between bank officials and the poor, political interference, inflexible lending policies and procedures, lack of provision for consumption credit and a widespread belief that the poor were non-bankable. Veerashekerappa, (1994) expressed his views regarding inequality in the distribution of institutional agricultural credit across the districts in Karnataka. He explained that the uneven distribution of credit supply is caused to some extent by operation and attitudinal deficiencies, but the districts which are characterized by relatively high levels of agricultural development, infrastructure development, rural literacy rate, irrigated area, cropping intensity, use of HYV and fertilizer consumption are in a better position in pulling the credit to the regions. Inequalities of credit also exist in the category of farmers. The marginal propensity to save of the progressive farmers is higher than that of less progressive farmers. Ramachandran Pillai, (2003) has observed that assets such as land, agricultural implements, vehicles and transport equipments and pump sets, tube wells, and other machinery are concentrated in the hands of landlords and rich peasants. So, they easily get institutional credit. This skewed distribution of assets has enabled the rich to garner the benefits of 3 productivity and production increases in the rural economy. Bank wise also credit is unequally distributed. The credit disbursements of commercial banks have been higher in southern region (52 percent) of India. Whereas, the co-operative banks have dominated in southern and western regions (56 percent). But the institutional credit flows to northeastern and eastern region are rather insignificant. It shows the regional imbalances in the credit flow by institutional sources (Agrawal K.P. et al., 1997). Another major problem faced by all these three agencies is the delinquency of loans. While the problem faced by all these three agencies is the delinquency of loans. While the problem became serious among co-operatives by 1970 itself, the commercial banks got into the problem only after 1975-76 because of their late entry into rural credit. Regional rural banks are having higher overdue compared to other agencies (Subramanyam, 2004). According to Bhat both from financial institutions and farmers point of view, overdue is high in commercial banks when compared to other banks. It is due to Government policy, ineffective legislation, indiscriminate financing, inadequacies in proper monitoring, co-ordination and follow up, inadequacies in training and co-ordination, natural calamities, political compulsion (Rao, 2004). Even though many financial institutions are started, their main objectives are to free the agriculturists from the clutches of moneylenders and non-institutional agencies. Because some study also shows that farmers have committed suicides due to non-repayment of borrowed amounts from the moneylenders. Hence aim is to reduce the problem of moneylenders. Because suicides of farmers in Andhra Pradesh (Parthasarathy, 1998) and northern districts of Karnataka (Muzaffar Assadi, 1998). Under these circumstances, it is essential to find out whether the financial institutions are able to meet all the credit requirements of farmers. What is the proportion of credit disposed by the commercial banks, Co-operative banks and other financial institutions? The financial institutions though provide short-term, medium term and long-term agricultural credit; there is no clear picture with regard to the assessment of the performance of this credit.