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Agriculture not only gives riches to a nation, but the only riches she can call her own.
- Samuel Johnson

Agriculture will continue to play an important role in the economic development and poverty
alleviation in India in the era of economic liberalization and globalization. The persistence of
hunger in the developing world means that ensuring adequate and nutritious food for the
population will remain the principal challenge facing policy makers in many developing
countries in the years to come.
For continuous rejuvenation of Indian agriculture rural banking system has to undergo
comprehensive outreach and ascending efficiency. For making sense of India as a emerging
µyouth nation¶, agriculture must be made intellectually and economically rewarding for youths
by means of partnership with private players and entrepreneurs. Without any doubt, agriculture¶s
role in economic growth remains critical to achieving all these goals.
Generation of gainful employment and income for the rural poor, strengthening of household
food and nutritional security and sustainable use of natural resources dominate the objectives of
agricultural development in the country. However, there is going to be paradigm shift in the
development strategy. Market forces will now greatly guide agricultural production, and private
sector would be a useful ally of public sector in the development process.
Knowledge will be the key catalyst of growth, besides the traditional sources of growth like land
and other resources. The most significant change will, however, be witnessed in the institutions
dealing with creation, protection, exchange and application of new knowledge and technologies.
c


 
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*If agriculture can do such great things, why have they not yet happened?´
The past decade has been one of agro-pessimism. The promises that agricultural development
seemed to hold did not materialize. This pessimism seemed to coincide with pessimism about
Sub-Saharan Africa. Especially for Sub-Saharan Africa the hope was that economic development
would be brought about by agricultural development. After the success of the green revolution in
Asia, the hope was that a similar agricultural miracle would transform African economies. But
this hope never materialized, agricultural productivity did not increase much in SSA, and worse,
the negative effects of the green revolution in Asia became more apparent, such as pesticide
overuse and subsequent pollution. Also in Asia the yield increases tapered off.
The skeptics put forward several arguments why agriculture is no longer an engine of growth.
For instance, the liberalization of the 1990s and greater openness to trade has lead to a reduction
in the economic potential of the rural sector: cheap imported Chinese plastic buckets out compete
the locally produced pottery. On the other hand, it does mean cheaper (imported) supplies. With
rapid global technical change and increasingly integrated markets, prices fall faster than yields
rise. So, rural incomes fall despite increased productivity if they are net producers3. The
integration of rural with urban areas means that healthy young people move out of agriculture,
head to town, leaving behind the old, the sick and the dependent. It is often also the men who
move to urban areas, leaving women in charge of the farm. This has resulted in the increased
sophistication of agricultural markets (and value chains) which excludes traditional smallholders,
who are poorly equipped to meet the demanding product specifications and timeliness of
delivery required by expanding supermarkets. The natural resource base on which agriculture
depends is poor and deteriorating. Productivity growth is therefore increasingly more difficult to
achieve. Finally, multiplier effects occur when a change in spending causes a disproportionate
change in aggregate demand. Thus an increase in spending produces an increase in national
income and consumption greater than the initial amount spent. But as GDP rises and the share of
agriculture typically decreases, the question is how important these multiplier effects are,
especially when significant levels of poverty remain in rural areas, which is the case in middle
income countries.
c

The disappointment with agriculture led many donor organizations to turn away from
agriculture, looking instead to areas that would increase the well-being of poor people, such as
health and education. However, since the beginning of the new century, there seems to be a
renewed interest in agriculture. A review of major policy documents including the well-
publicized Sachs report and the Kofi Annan report show that agriculture is back on the agenda
again. It is argued that growth in the agricultural sector contributes proportionally more to
poverty reduction than growth in any other economic sector and that therefore alone, the focus
should be on the agricultural sector when achieving to reach MDG 1.
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A large proportion of the population in India is rural based and depends on agriculture for a
living. Enhanced and stable growth of the agriculture sector is important as it plays a vital role
not only in generating purchasing power among the rural population by creating on-farm and off-
farm employment opportunities but also through its contribution to price stability. Where once
India had to depend on imports to feed its people, since 1990 it is a net exporter of agri-food
products. Its agriculture is large and diverse and its sheer size means that even slight changes in
its trade have significant effects on world agricultural markets. Although the share of agriculture
in real GDP has declined below one-fifth, it continues to be an important sector as it employs 52
per cent of the workforce. The growing adult population in India demand large and incessant rise
in agricultural production. But per capita availability of food, particularly cereals and pulses, in
recent years has fallen significantly. An analysis by Anríquez & Stamoulis(1970) on agricultural
transformation clearly indicates that the labour share of agriculture declines much more slowly
than the share of agriculture in national GDP. Unless policies and investments are put in place to
foster agricultural productivity, there is a danger that the decline of agriculture will be
accompanied by increased rural poverty, some of which will find its way into the urban areas. At
the same time, policies and programmes which increase the human capital of the rural poor and
allow them to enter more remunerative labour markets are powerful tools to ensure a smooth
transition of people out of agriculture without increasing poverty. As a result, slackening growth
of agriculture during last decade has been a major policy concern.
How India will develop is still a big unknown, with the picture changing rapidly. Questions have
arisen about India¶s capacity to compete in global markets under the current farm structure and
farm policy. As the service economy grows, the share of agriculture will diminish, which may
also have implications for India¶s stance on trade and agriculture policy in the future.
Moreover, the linkage of this sector with other sectors of the economy cannot be denied. It is this
view and keeping in mind the changing role of this sector, that a study of its new role has
become increasingly important.
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Agriculture is the mainstay of the Indian economy. Agriculture and allied sectors contribute
nearly 17.8 and 17.1 per cent of Gross Domestic Product (GDP of India) during 2007-08 and
2008-09 respectively. The agricultural output, however, depends on monsoon as nearly 55.7 per
cent of area sown is dependent on rainfall.
An all time record in production of food grains of 233.88 million tonnes is estimated in 2008-09
as per 4th Advance Estimates. This is about 13.10 million tones more than last year's production
of food grains. The production of rice is estimated at 99.15 million tonnes which is about 2.46
million tonnes more, production of wheat is estimated at 80.58 million tonnes which is 2.01
million tonnes more, production of coarse cereals is estimated at 39.48 million tonnes which is
1.27 million tonnes more and production of pulses is estimated at 14.66 million tonnes which is
about 0.99 lakh tonnes more than the production during 2007-08. The sugarcane production is
estimated at 2,712.54 lakh tonnes which is about 769.34 lakh tonnes less than the production
during 2007-08. Cotton production is estimated at 231.56 lakh bales (of 170 kg. each) which is
27.28 lakh bales more than the production during 2007-08. Jute and mesta production during
2008-09 is estimated at 104.07 lakh bales (of 180 kg each) which is about 8.04 lakh bales less
than the production during 2007-08.
The total area coverage under food grains in 2008-09 has been reported as 123.22 million
hectares against 124.07 million hectares in 2007-08. The area under rice is estimated at 453.52
lakh hectares which is significantly higher about 1,437 lakh hectares. However, the area
coverage under wheat during 2008-09 estimated at 278.77 lakh hectares is slightly lower by
around 1.62 lakh hectares. The total area coverage under coarse cereals during 2008-09 is
estimated at 276.17 lakh hectares which is slightly lower by 8.64 lakh hectares as compared to
2007-08 The increase in Minimum Support Price (MSP) in 2008-09 over 2007-08 amongst
cereals has ranged between 8.0 per cent wheat to 52.6 per cent (ragi). The percentage increase in
case of paddy (common) is 31.8 per cent. In case of pulses, the increase has ranged between 8.1
per cent (gram) and 48.2 per cent (urad and moong).
Centrally Sponsored Scheme on National Food Security Mission has been launched in the
country to enhance the production of rice, wheat and pulses by 10, 8 and 2 million tonnes
respectively by the end of the 11th Plan. The Mission covers 312 districts in 17 States and has
become operational from Rabi 2007-08. The focused and target oriented technological
c

intervention under NFSM has made a significant impact since inception which is reflected by the
fact as per the third advance estimate of 2008-09, the production of rice has raised to a level of
99.37 million tonnes thus depicting increase of 2.68 million tones when compared to 2007-08
and 6.02 million tonnes against 2006-07. Similarly, the situation is also promising in case of
wheat, wherein the production of wheat showing an increase of 2.76 million tonnes over the last
year. Consequently, as per the third advance estimate of 2008-09, the production of wheat is
estimated to the level of 77.63 million tonnes which is 1.82 million tonnes more that 2006-07. In
case of pulses, the production was recorded at 14.20 million tonnes during 2006-07.
Accordingly, as per the third advance estimate of 2008-09, the production of pulses is estimated
at 14.18 million tonnes, which is almost a stagnated production trend when compared to 2006-
07.
The Union Government has constituted a National Rainfed Area Authority (NRAA) on 03-11-
2006 to give focused attention to the problem of the rainfed areas of the country. The Authority
is an advisory, policy making and monitoring body charged with the role of examining
guidelines in various existing schemes and in the formulation of new schemes including all
externally aided projects in this area.
A scheme of debt waiver for small and marginal farmers and debt relief for other farmers has
been announced by the Government in the Union Budget for 2008-09. Against the target of Ê
2,
25,000 crore for agriculture credit flow for 2007-08 the achievement was Ê
2, 43,569 crore.
Agricultural Extension has been strengthened and Agricultural Technology Management
Agencies (ATMAs) have been set up in 565 districts by the end of 2007-08.
Under NHM, an area of about 8.25 lakh hectares has been brought under horticulture crops, 1.17
lakh hectares of senile plantations have been rejuvenated and 1710 new nurseries have been set
up since launching of NHM in 2005. An area of about 6 lakh hectares has been covered under
the Scheme of Micro Irrigation since it was launched in 2006. Current year's target is coverage of
4 lakh hectares.

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The following objectives have been kept in mind while preparing for the structure and
implementation schedule of the project:
uc First, to argue how does agriculture contribute to economic development, and in
particular how does it relate to poverty
uc Second, the agricultural sector has changed considerably in the past decades:
therefore, to understand what are the main drivers of this change
uc Third, to appreciate the relationship between economic or agricultural growth and
pro-poor development
uc Fourth, to realize how agriculture relate to other sectors in the economy
uc Fifth, to understand who is included and who is excluded in agricultural development,
specifically focusing on small farms
uc And finally, to justify that if agricultural development is indeed important to
economic development, then why despite all the efforts and investments, has this not
led to more successes
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In *Indian Agriculture at 2000´, B.M Desai, R. Radhakrishna and V.S.Vyas attempt to focus on
the prospects and problems of Indian agriculture by the turn of the century. Its emphasis is
mainly on issues relating to distribution, and the increasing of the purchasing power of the
poorest segments of the population. Its findings are that by the turn of the century, even under
the most optimistic conditions of economic development, about 18 crore people depending on
agriculture will be living below the poverty line. The problems of these Indian poor cannot be
solved within agriculture because this sector cannot by itself provide enough employment and
income.
In particular, the paper emphasizes the prospects and problems of agriculture in the developing
countries. The implications of two alternative rates of growth of population and national income
for agriculture are explored. First, past trend rates are extrapolated. Second, a normative scenario
is envisaged where future demands on agriculture are generated by a higher rate of growth of
income.
The basic thrust of the study is to achieve a significant acceleration in agricultural production
and alleviation of poverty. These goals are sought to be, met through yield increase, area
expansion, intensified land use, and changes in crop pattern. The authors also envisage a sharp
increase in the livestock output. The main institutional constraints to meeting the goal of
increased production are access to land and water. An important departure of the paper is the
explicit realization that increased production is a necessary, though not a sufficient, condition to
alleviating poverty. It is felt that the most effective means of eliminating poverty and under-
nourishment are to raise incomes of the target groups.
The main variables considered are agricultural and livestock production, income and expenditure
generation, and poverty. Country-wide aggregate data for arable land, irrigated and unirrigated
gross cropped area, their crop-wise allocation, yields, labour output ratios, and ratios of value-
added to gross output, are taken.cThe corresponding landholding class figures are worked out.
The main source of data on area and crop-pattern by size-class of farms is the Agricultural
Census.
Having determined the extent of poverty for the country as a whole , two questions come to their
mind. First, the poor have to be indentified; and second, the causes of poverty must be
c

determined to help the policy-maker match targets with instruments. These two questions are
interrelated and hence issues relating to them are taken up together.

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Table 1 provides a summary of their findings. Clearly, the results are not comparable because of
the different definitions of poverty used and the distinction drawn between land owned and land
operated. However, they are useful because they provide us some idea of the magnitude involved
in identifying the rural poor. It must be pointed out that from these studies it is not possible to
come to a consensus about the prioritization of the causes of poverty.cThus, the problems of
poverty cannot be 3olved within agriculture because this sector by itself cannot prov.de enough
employment and income.
c

*India¶s Role in World Agriculture´ published by Directorate-General for Agriculture and Rural
Developmentcstates that agriculture plays an important, though declining role in the economy. Its
share in overall GDP fell from 30% in the early nineties, to below 17.5% in 2006. This is high
compared to China and Brazil, at 12% and 5% respectively. Over this period the share of
industry has stayed relatively constant, reaching nearly 28% in 2006. c
Meanwhile the services sector has grown rapidly (accounting for about 65% of total GDP growth
from 2000-2005), to almost 55% of GDP in 2006. The World Bank predicts that the shift
towards the service sector will continue at the expense of agriculture, whose share could decline
by 30% by 2030.
Despite India¶s economic development, over 70% of the population still lives in rural areas.
Agriculture is the key employer with around 60% of the labour force, down from 70% in the
early nineties. This compares with 44% in China (2002) and 21 % in Brazil (2004).
The decline in agriculture in the labour force has not kept pace with its decline in the economy.
This stickiness has been attributed to low labour mobility and slow growth in productivity in
agriculture. In India agricultural value added per worker has grown by only 15% in real terms
from 1990 to 2004. By comparison productivity in China rose by over 60% and more than
doubled in Brazil.
Further, it explores the changing diet of the Indian population and its impact in India¶s trade
position and its position in relation to Brazil and China. Cereals are the staple food in India,
providing over half the calories consumed, while pulses are the main protein supplement in the
diet. Rising incomes and the influence of globalization have contributed to changes in the diet
with a slight decrease in cereals consumption and an increase in pulses, edible oils, fruits and
vegetables, milk and meat, which is growing from a low base. In the case of edible oils, the fall
in prices afte
r the liberalization of imports further stimulated consumption. However although diets are
diversifying, India still lags behind Brazil and China in terms of daily calorie intake per capita.
c

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OECD and FAPRI (Food and Agricultural Policy Research Institute) both expect India to play a
bigger role in world markets in future. It is likely to remain a small net exporter overall.
India is forecast to consolidate its position among the world¶s leading exporters of rice (its top
export), though the volume of exports has been erratic since the mid nineties (depending on the
size of the crop and on domestic consumption). Currently it is the second largest rice producer
after China and the third largest net-exporter after Thailand and Vietnam.
FAPRI expects it to increase its world market share from 16% to 20% by 2015 as area and yields
increase and per capita consumption declines. OECD meanwhile takes a more conservative view
of production prospects and therefore of export potential.
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Turning to imports, in 2006/07 India became a net importer of wheat having been a net exporter
for the 5 years previously. However it is not expected to be a big net exporter in the coming
decade. For dairy there may be opportunities for EU in the future. If an EU-Indian FTA is
agreed, then, given changing consumer habits, India is a potential market for EU exports of high
quality processed milk products.
Last but not least, India is projected to remain a leading vegetable oils importer, absorbing one
quarter of world soybean oil imports and 14% of palm oil imports. Although the share does not
increase much over the projection period, this masks an increase in imports from 5 million
tonnes to 6-8 million tonnes by 2016/17, given the expansion in world trade in vegetable oils.
Indian consumption of vegetable oils has grown faster than production since the mid-nineties and
the trend is expected to continue. Combined with the recent hike in prices, this could lead to a
doubling of India¶s vegetable oil import bill in 10 years.
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*The Importance of Agriculture in Sustainable Economic Growth in India´ by Rahul Sudhakar
Mane affirms that agriculture will continue to play an important role in the economic
development and poverty alleviation in India in the era of economic liberalization and
globalization. It makes an essential point when it declares that the time has come when we
should focus more on the economic wellbeing of the women and men feeding the nation than just
on production. It is clear that the human dimension must be the principal determinant of
agricultural policies and not just production in physical terms. It stresses further: *The time is
therefore opportune for revitalizing our agricultural progress by making agrarian prosperity and
food security and sovereignty the bottom line for government policies and priorities in
agriculture and rural development.´
The paper highlights the issue of Access to Credit and Investment in Agriculture. It states that
several initiatives have been taken in recent years to improve the agricultural credit delivery
mechanism. However, some bottlenecks continue to affect the flow of credit to agriculture. To
attain a higher growth in agriculture, the major areas requiring attention in the financial sector
are spread of insurance against crop losses and facilities for meeting the needs of the rural
economy. Newer forms of credit assessment and risk management systems demand immediate
establishment, besides upgrading skills, and ushering in changes in attitudes and mindsets. Use
of information technology is crucial to facilitate transformation in various processes of rural
credit.
Rural banking system demands comprehensive outreach and ascending efficiency.
The timely made available credit in required quantities and at appropriate interest rate will
certainly transform the investment patterns of farming system.
On the issue of subsidies the author believes that the debate about subsidies causing successive
governments in sustaining burden of Annual Budgetary Deficit continues to haunt planners. The
economy wide analysis of input subsidies in Indian agriculture reveals that subsidies have
outlived their aim and have become unsustainable. In order to release resources for higher
investments in the agricultural sector, large scale price and institutional reforms are needed to
relieve the pressure of subsidies on the Exchequer.
c

If NABARD, as the leader of agriculture and rural credit is successful in ensuring convergence
between credit availability and credit absorptive capacity of the farmers and other rural
borrowers, a objective of building an efficient credit delivery system will be reached.
The author highlights the role of agriculture in Rural Development and Poverty Alleviation and
says that it is widely acknowledged by stakeholders that the role of agriculture and the rural
economy is fundamental for securing sustainable gains in the fight against poverty. There is
greater appreciation for the fact that agriculture has strong links with other sectors. Productivity
induced agricultural expansion can *pull´ other sectors with it and increase economic activity
and employment opportunities in rural areas.

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*The Role of Agriculture in Economic Development´ by Gerdien Meijerink & Pim Roza states
that recent years have seen tremendous changes, in economic development in developing
countries in general, but for the agricultural sector in particular. This coincides with a renewed
debate on the role of agriculture, whereby the realization of the important role of agriculture is
not only reaffirmed, but also the importance of the linkages between agricultural and non-
agricultural sectors, farm and nonfarm activities and rural and non-rural regions is emphasized.
The writer reminds that important questions and concerns remain and a new agenda for
agriculture is slowly emerging. In this agenda, there are several key elements:
uc The consequences of *new agriculture´ as coined by (de Janvry and Sadoulet, 2006),
which includes high value crops and quality foods required by urban distribution
channels and exports (health standards, organic foods), standardized delivery in contracts
with supermarkets, demands of agro-industry for non-traditional exports, labeling and
certification, vertical coordinated chains, etc.
uc The future of small farms, poor rural households and remote (or marginal) areas who are
often excluded from the *new agriculture´
uc The role of local supply chains and food crops, which we can label the *local agriculture´
(as opposed to the *new agriculture´) in rural development and for small farms
uc The role of the non-farm (rural) economy, in offering opportunities to rural (poor)
households
uc The establishments of safety nets, for those vulnerable poor households who have very
little opportunities, little access to non-farm income and for whom agriculture is a risky
and low subsistence livelihood strategy

The need for agricultural development is still very much acknowledged, although in a new form
than a few decades ago. Hazell stresses the importance of food staples for low-income countries,
which might offer more important growth opportunities for many small farmers than the *new
agriculture´, which is available only to a relatively small group of farmers.
Finally, the author says that policy attention has long focused on agriculture¶s traditional role to
provide food, create jobs, earn export income, generate savings and funds for investment, and
produce primary commodities for expanding industries. But the role of agriculture often goes
beyond these direct, market-mediated contributions. Agriculture plays also an important role in
c

providing indirect non-commodity contributions that are public goods, social service benefits and
environmental services not captured by markets. Agriculture thus contributes to
uc environmental services such as soil conservation, watershed services, biodiversity, and
carbon sequestration;
uc poverty reduction;
uc food security;
uc agriculture as a social safety net or buffer in times of crisis, and
uc social viability

A review of 11 case-studies by FAO by the author revealed that these indirect contributions are
not well understood, seldom analyzed in the context of development, and rarely reflected in
national and rural development policy formulation. This may be due to the fact that the market
signals are missing and policy signals are wrong and the lack of information concerning the
sector¶s evolving market and non-market roles.
Last but not the least, the study underlines the strong interdependence between agriculture and
other sectors, as well as the many cross-sector linkages through which agricultural growth
supports overall economic growth and the many benefits to society that are not measured by
economic growth indicators alone.

*Agriculture and Development´ by Allan McKinnon ± DFAT essentially makes three basic
points:
uc the agricultural sector can play a fundamental role in development
uc there are substantial distortions in international agricultural trade which are undermining
the agricultural sector in developing countries
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uc the WTO agricultural negotiations offer an opportunity to accelerate development by

providing the main forum for achieving major reforms in the international agricultural
trading system
The author suggests that countries pursuing sustained economic development have much to gain
from the WTO negotiations in agriculture. In short, agriculture tends to play a fundamental role
in economic development, but sadly, developing country producers must compete in the most
highly distorted of international sectors. The current WTO negotiations provide them with
perhaps the only opportunity to correct those distortions.
More opportunities in agricultural markets for developing countries can act as a springboard to
their overall integration into a fast globalizing world economy, ultimately allowing them to reap
their fair share of its rapidly developing new opportunities in many sectors of production and
trade.
A strong agricultural sector can promote economic development through several channels:
uc it increases production of food and fiber and lowers their prices ҟҏthis increases the
purchasing power of developing country consumers who typically spend more than two
thirds of their income on food ҟҏlower food prices improve nutrition, allowing an increase
in labour productivity in every sectorҟҏlower agricultural prices allow cost reductions to
industries that use agricultural inputs
uc it increases demand for the output of other sectorsҟҏdemand for inputs to agricultural
production such as fertilizer, transportation, commercial services, construction and
technological inputs ҟҏand demand for consumer goods and services, as rural standards of
living increase
uc it generates employmentҟҏagriculture itself, and the construction of the infrastructure that
agriculture needs, are very labour intensive - even more labour intensive than
manufacturing industries such as textiles ҟҏin addition, the increase in rural demand is for
relatively labour intensive consumer goods and services
uc it provides a sustained flow of labour and capital for the development of other sectors
uc ҏit eases the foreign exchange constraint that many developing countries face ҟҏit is the key
foreign exchange earner in two-thirds of developing countries ҟҏagricultural production
also tends to be less import-intensive than manufacturing
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The author concludes by suggesting that self-sustaining development of the agriculture sector is
especially fundamental during the early phases of development because of the size of the
agricultural sector, the extent of rural poverty, and the primacy of food.

*No Silver Bullets´ by Sushma Ganguly says that agriculture faces complex global and local
issues, requiring solutions within the context of sustainable rural development, and outlines how
the World Bank is approaching them.
She states that agriculture is closely associated in the public mind with the Green Revolution
which emerged to avoid mass famine and starvation. It largely succeeded by increasing crop
yields mainly through improved technology and investments in infrastructure and agriculture
services. But a few adverse environmental impacts are also emerging, while the growth in yields
it brought has begun to taper off. Meanwhile increased agricultural productivity in industrial
countries, Latin America, and Asia created surpluses, breeding complacency among consumers
c

and policymakers. Support to agriculture, including that provided by the World Bank, waned
alarmingly. Land degradation, water scarcity, forest destruction, and overexploited fisheries
increased, damaging the lives of rural people.
She says that many people think that the world remains awash in food, but this is not longer the
case. Now, burgeoning demand for food and feed in fast-growing developing countries²
especially in Asia²combined with increased competition for agricultural resources and climatic
events in significant parts of the world signal a tightening in world food supplies that may be
with us for some time.
She warns that global carry-over wheat stocks are at some of the lowest levels ever recorded,
equivalent to less than 10 weeks of consumption. Corn and wheat prices have risen by up to 60
per cent this year. In this context, a renewed focus on agricultural research and diffusing
technology is more critical than ever.
Agriculture faces complex issues which do not respond to the desire for a silver bullet. Donors
have tried several of them²integrated rural development, training and visit extension²and
recently some have argued for universal fertilizer subsidies. All have failed. She concludes by
saying that in future, we must evaluate the entire value chain of agriculture through marketing
and processing (from fork to plough) and decide how best to improve the productivity and
effectiveness of the land, water, labour, capital, institutions, and markets that contemporary
farmers rely upon to grow and sell their food. There is room for everyone²donors,
governments, the private sector, and NGOs alike²to scale up activity on a sustainable basis.
c

*Impact of Agricultural Credit on Agriculture Production: An Empirical Analysis in India´ by

Abhiman Das, Manjusha Senapati, Joice John notes that agricultural credit has been rising in
recent years as a share of both the value of inputs and the value of output. There are wide
regional disparities in the disbursement of agricultural credit by scheduled commercial banks. At
the same time the share of agricultural GDP in total GDP is falling. In this context, this paper
examines the role of direct and indirect agriculture credit in the agriculture production taking
care of the regional disparities in agriculture, credit disbursement and agriculture production in
an econometric framework using Dynamic Panel Data Analysis with Instrumental Variables
using Arellano-Bond Regression using district level data from four select states namely
Maharashtra, Andhra Pradesh, Punjab and West Bengal belonging to four different regions in
India. Using Arellano-Bond Regression this paper tries to address two econometric problems
namely joint dependence of output and credit and unmeasured or immeasurable district
characteristics.
The analysis suggests that the direct agriculture credit amount has a positive and statistically
significant impact on agriculture output and its effect is immediate. The number of accounts of
the indirect agriculture credit also has a positive significant impact on agriculture output, but
with a year lag. These results reveal that even though there are several gaps in the present
institutional credit delivery system like inadequate provision of credit to small and marginal
farmers, paucity of medium and long-term lending and limited deposit mobilization and heavy
dependence on borrowed funds by major agricultural credit purveyors, agriculture credit is still
playing a critical role in supporting agriculture production in India.
The authors compliment Mohan (2006) in saying that agriculture¶s role can be further enhanced
by much greater financial inclusion by involving of region-specific market participants, and of
private sector suppliers in all these activities, and credit suppliers ranging from public sector
banks, co-operative banks, the new private sector banks and micro-credit suppliers, especially
self-help groups.
Three main factors that contribute to agricultural growth are increased use of agricultural inputs,
technological change and technical efficiency. With savings being negligible among the small
farmers, agricultural credit appears to be an essential input along with modern technology for
higher productivity. An important aspect that has emerged in last three decades is that the credit
is not only obtained by the small and marginal farmers for survival but also by the large farmers
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for enhancing their income. Hence, since independence, credit has been occupying an important
place in the strategy for development of agriculture.
The agricultural credit system of India consists of informal and formal sources of credit supply.
The informal sources include friends, relatives, commission agents, traders, private
moneylenders, etc. Three major channels for disbursement of formal credit include commercial
banks, cooperatives and micro-finance institutions (MFI) covering the whole length and breadth
of the country. The overall thrust of the current policy regime assumes that credit is a critical
input that affects agricultural/ rural productivity and is important enough to establish causality
with productivity. Therefore, impulses in the agricultural operations are sought through
intervention in credit.

Table 4:

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*Resource Allocation in Indian Agriculture´ by Ranjit K Sau says that the entire gamut of
resource allocation in Indian agriculture, therefore, calls for a fresh, rigorous scrutiny. The New
Strategy benefits the relatively big farmers; and its overall impact on small cultivators and
landless labourers still remains dubious. In the perspective of acute rural poverty and
unemployment, this strategy may not turn out to be an unmixed blessing. It is well known that in
India there exists a wide gap between the capacity of an irrigation system and the actual
utilization thereof. No less serious are the malpractices and inefficiency of actual distribution of
irrigation water, the lack of drainage and the deficiencies in design of irrigation projects. It is all
the more surprising; therefore, that nonetheless the contribution of irrigation water to agricultural
productivity in India has been so significant.
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Table 6:

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The fundamental idea of the paper is that the peasant community as a whole (not merely the
individual farmers) in a developing country is 'efficient but poor'. So "no appreciable increase in
agricultural production is to be had by reallocating the factors at the disposal of farmers who are
bound by traditional agriculture". It follows that tampering with the use of existing resources
cannot transform traditional agriculture; only a massive in- fusion of new factors and techniques
can do so. Such massive change, with India's enormous agricultural sector and limited savings
and skills, implies selection of areas. Well-watered areas, especially if irrigated and hence
already ex- posed to some use of non-traditional factors, are the obvious choice. Hence IADP,
IAAP, and the New Strategy of concentrating agricultural inputs in selected areas of assured
water supply.
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*Subsidy Syndrome in Indian Agriculture´ by Ashok Gulati Anil Sharma states that the
economy-wide analysis of input subsidies in Indian agriculture reveals that subsidies have
outlived their aim and have become unsustainable. In order to release resources for higher
investments in the agricultural sector, large- scale price and institutional reforms are needed to
relieve the pressure of subsidies on the Exchequer. Under the circumstances, it makes much
sense to improve terms of trade for agriculture and complement this by stepping up investment in
agriculture through reduction in subsidies. The increased investment in agriculture appears to be
a better bargain than short-sighted measures such as subsidies. This is because of the fact that
cultivable land in India is in short supply and raising productivity per unit of cultivable area will
require heavy investments in irrigation, rural infrastructure, research and extension. Also,
investments in basic infrastructure correct for regional imbalances and promote greater equity at
farm level, while subsidies tend to accentuate inequality.
The subsidies in agriculture are generally rationalized in the overall economic context that they
play a crucial role in stimulating development of any country through increased agricultural
production, employment and investment. Also that subsidies, particularly in developing countries
must be construed as more an instrument promoting risk-taking function of the farmers than
anything else. More specifically, subsidies are advanced either to promote the use of new inputs
or to transfer income in favour of farming community, maybe to keep them in 'parity' with non-
farming communities. The use of subsidies to promote new inputs is generally the case with
developing countries and transferring the income in favour of farming community is the case
with developed countries.
India adopted the twin approach of input subsidization and output price for her agriculture. To
know the impact of such a complex and dual policy (i.e., input subsidies and output price
support) in India, one will have to work out the estimate of what is known as aggregate measure
of support (AMS). AMS is the annual aggregate value of market price support, non-exempt
direct payments and any other subsidy not exempted from the reduction commitment expressed
in monetary terms.
Input subsidies are cutting into the resources which could have been invested in generating new
productive potentials. This is because in a country like India where resources are limited, the
achievement of any particular objective usually comes at the expense of other competing
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objective. Thus, it follows from the above that a major chunk of the increase in resource flows is
being diverted to meet the expenditure originating from high input subsidies rather than making
investments in agriculture. This trend, if continues, is worrisome because if the resources which
are meant to create productive investments in the long term are diverted to meet short- term
measures like subsidies, the agricultural growth suffers.' And, history is replete with examples
which clearly reveal that development of agricultural sector is essential to national growth.
The author clarifies that there is nothing wrong with subsidies if they are well-targeted and reach
the intended beneficiaries and have a definite time frame for their termination.
Keeping these facts in view, the objective of this paper is to measure the extent or the magnitude
of subsidies on four major inputs in Indian agriculture, namely, irrigation water, electricity,
fertilizer and credit. Once these estimates are available to the policy-makers appropriate policies
can be devised to cut down the size of input subsidies so that long- term growth in agriculture is
not jeopardized. An attempt has also been in the present study to suggest ways to reduce or to
check the ever rising input subsidies.

*Agriculture: Second Round of Economic Reforms´ by V S Vyas argues that four major
weaknesses plague Indian agriculture. These include:
uc preponderance of low-value agriculture,
uc low cost-benefit ratio,
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uc inefficient use of natural resources and

uc deterioration in self-help institutions.

The development strategy, therefore, should aim at - increase in 'value-added' per hectare, more
so on the small and marginal holdings; - improvement in productivity of inputs, especially
purchased inputs, such as fertilizer and irrigation water; - prevention of environmental
degradation, especially degradation of land and water resources; and - encouragement to farmer'
self-help institutions, particularly at the grass roots level. He states that it will be an over-
simplification if we were to assume that these and other problems of growth and equity can be
resolved only by policy initiatives.
However, economic policies have an important role, and if used judiciously can supplement or
support technological and institutional developments. While discussing the economic policies for
agriculture, the author states at the outset that macro policy reforms such as attempts to curtail
budgetary deficits or realign the value of the currency have a profound impact on the agricultural
sector. However, he concentrates mainly on sectoral policies and comment only on few critical
issues, such as, next phase in land reforms, policies on prices and subsidies and, agricultural
trade policies.
He emphasizes that there is a need to recognize that price policy is a weak instrument for income
transfers; our capacity to offer minimum support prices for a large number of commodities is
limited; instrument of mini- mum support prices has to be used sparingly; greater reliance needs
to be placed on crop insurance and on forward markets; procurement operations need to be made
more business like; need for dovetailing agriculture and trade policies is urgent; FCI should be
decentralized and debureaucratized; states should be made major stakeholders in the public
distribution system.
He reviews the experience in agricultural trade and an examination of future prospects leads him
to suggest that we should reach effective food self-sufficiency in cereals and be prepared for
diversification once a situation of food surplus arises; - emphasize export of the commercial
crops where India has comparative advantage, particularly in cotton, tea and tobacco; and
- harness export potential of processed agricultural commodities, fruits, flowers, herbs, etc, and
ensure participation of small holdings in their production. There is also a need for institutional
reforms. Policy for canalization of exports through public sector organization, fixing arbitrary
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minimum base line price for exports, and 'stop-go' policy based on ad hoc consideration will
have to be substituted by a well thought out, long-term strategy for agriculture exports in tandem
with domestic economic policies.
He concludes my suggesting that the main ingredients of a reform agenda in agriculture should
be:
uc Acceleration of the process of liberalization in domestic markets
uc Un-freezing the lease market
uc Thoroughly revising the agricultural price support system by (a) curtailing the scope of
minimum support prices to aim at protecting variable costs for a few commodities in
selected regions, and (b) giving greater emphasis on crop insurance and forward markets
uc Carrying procurement operations on commercial lines
uc Involving states and the lower tiers of Panchayati Raj in public distribution of food grains
uc Dovetailing price and trade policies in an effective manner
uc Establishing the principle of cost- recovery in agriculture inputs, and phasing out input
subsidies, by (a) placing a 'cap' on existing subsidies, (b) announcement of a time bound
programme of phasing out input subsidies
uc Working out a long-term export strategy for 'commercial crops' and other ' dynamic and
high value crops
uc Progressive decanalisation of exports of agricultural commodities and removing other
irritants
uc Preparing to challenge any deviation from the main objective of WTO, and take initiative
in organizing other developing countries for the same purpose
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*How to Renew Indian Agriculture?´ by Martien van Nieuwkoop and Dipak Dasgupta believes
that India¶s rural areas are the battleground in the fight against poverty - they are home to nearly
three-quarters of the country¶s poor. Rising farmers¶ suicides, the slowdown in agricultural
growth, the apparent fall in rural nutrition and calorie-intake, and the slowing of the decline in
poverty all trigger the need for introspection. Based on various analytical work and project
interventions, and taking stock of the Government¶s recent initiatives in the sector, the
authors spell out a few pointers as to what can be done differently to reinvigorate Indian
agriculture:

uc Switch Government expenditures away from large and often unproductive subsidies that
do not often benefit farmers, into more productive investments. One area, for example,
is fertilizer subsidies, another is public food subsidies, and yet another is power subsidies
(for groundwater pumping). In addition to being bad for the environment, as well as a
potential source for the leakage of funds, these subsidies absorb increasingly larger shares
of agricultural spending. This agricultural spending could instead be used to transform
the rural areas with roads, water supply, electrification, research and extension, market
support and others. The transition will, however, not be easy because of the long years of
reliance on the system, the modest gains that farmers currently receive, and the lack of
confidence in taking bold measures. The way out may well be a negotiated
rationalization of the system---explaining the transition and the gains that it will bring,
with farmers in the front-seat.
uc Remove the regulatory barriers to domestic marketing and trade. Most states are already
in the process of amending the Agricultural Produce Marketing acts that will allow much
more competition and greater participation of the private sector in the marketing of
agricultural produce---thereby raising the prices that farmers receive and making the
sector more dynamic. This will entail a very different role for the state, including the
need for organizing farmers so that they are better positioned to capture economies of
scale in agricultural marketing and value addition. Again, implementation will be the key.
uc Manage water, technology and land better. Water reforms will be crucial to provide
much greater farmer-centered operations, better maintenance of irrigation systems, and
cost-recovery. The strong interests that operate against such reform will need to be
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carefully managed. Unlocking the potential of rain-fed areas will be even more critical.
This will need to emphasize soil and water conservation, or drought-proofing and risk-
coping mechanisms such as crop insurance, while exploring opportunities in bio-fuels
and carbon financing. A strong push from a specific mission agency may be needed. A
related issue is facilitating agricultural diversification, together with an integrated
extension and research system that emphasizes on-farm practices. The ATMA model has
already been rolled out in 200 districts; the main issue is of ensuring the ownership of the
model at the grassroots level and the extension of marketing support. More secure land
rights, especially for the poor, is the other key area. While the computerization of land
records is progressing, a comprehensive effort is needed to improve land administration.
uc Re-examine forest dependent peoples¶ transformation. Put forest dependent people in the
driver¶s seat and provide them with much stronger land and resource rights, along with
support structures. Joint forestry management is improving and producing better
results. The recent Tribal Rights Bill has opened the door to better community forestry
management. Implementation, learning, and community involvement is now the key. In
the same vein, empowering the poor by scaling-up and replicating rural livelihood
development models (e.g., self-help groups) have the potential to bring about very large
impacts on poor rural households. In this, non-farm activities may become increasingly
important.
uc Strengthen the monitoring and evaluation system. Reliable learning of what works and
what doesn¶t will allow cutting out the duplication and fragmentation of many existing
schemes. Improve the system so that it starts at the ground-level with users being
empowered to generate local solutions rather than through top-down designs that are
imposed upon them from outside.

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Since the research carried out for this project is descriptive in nature, the various documentations
will require a clear understanding of the agricultural sector¶s contribution to the Indian economy
uc I will initially read the various journals, and reports published by international and
government bodies to understand the role of agriculture for any economy
uc I will then quantify the contribution of agriculture in the Indian economy by comparing
and analyzing pre-liberalization and post liberalization, and pre green revolution and post
green revolution data
uc Data collection will be done through reference to related articles, newspapers, magazines,
in-house journals of college and othersc
uc I will then focus on the challenges faced by this sector and various reforms which the
sector must undergo to remain an attractive sector. c
uc estimate and examine the trends in capital formation, private and public, and its composition in
Indian agriculturec
uc I will also highlight the need of the Indian economy to reduce its dependence on the
agricultural sector and effect on the agricultural sector because of the same. The report
will carry an extensive research on the above presented dichotomy and try to
suggest/recommend alternatives for the same.c
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The determinants of private investments are fairly identified in a behaviouristic frame in

investment literature. The same, however, cannot be affirmed about public investments which
have been usually treated as exogenous variables by scholars in their macro-modeling of the
Indian economy. The study of B D Dhawan and S S Yadav¶s µPublic Investment in Indian
Agriculture Trends and Determinants¶ is an exploratory effort in establishing a functional
relationship for public capital formation in Indian agriculture.
It argues that the public investments in Indian agriculture enlarge the productive base of
agriculture provided these result in real investments, and not paper investments which enrich
simply the pockets of the concerned politicians, engineers, administrators, contractors, etc,
without the creation of corresponding physical works. (Scale of investment leakage, though it
varies across states, is not small when viewed in its totality because bulk of the public
investments in agriculture are meant for irrigation works which entail lot of construction activity
wherein potential scope for leakages is utmost.) Besides directly enhancing the stock of capital
employed in agriculture sector, public capital formation in agriculture is known to stimulate
farmers' own investments in farm business, resulting in a further enlargement of capital stock of
agriculture. This indirect enlargement of capital stock due to complementary effects of public
investments on private investments in farming is of a substantial magnitude. According to one
assessment, there is almost one-to-one correspondence between the two categories of farm
investments, that is to say, one rupee of public farm investment leads to an additional one rupee
of private farm investment.
Regressing public investment in agriculture (INVESTMENT) on both net borrowings (LOAN)
and surplus on revenue account (SAVING), the paper found that one rupee of state borrowings
(from the market as well as non- market sources like the centre) resulted in an increase of about a
little under one-third of a rupee in public capital formation in agriculture. The resultant increase
from one rupee of addition to public savings was somewhat higher as per the following
regression equation:
INVESTMENT = 202.22 + 0.3129 LOAN (2.10) (10.30) +0.3951 SAVING
Where, R2 = 0.8089 n = 33
According to Bhide et al (1996), this ex- ceptional case is that of Ahluwalia and Rangarajan
(1986) wherein total public investment of the economy as a whole is an endogenous variable.
Savings in the public sector and market borrowings by the public sector are taken by Ahluwalia
and Rangarajan as explanatory variables for total public investment.
Net borrowings plus surplus on revenue account together determine the total availability of
investment funds with the state governments. Evidently, revenue deficit in a year decreases the
net availability of investment funds since part of the borrowed funds get absorbed in covering the
deficit itself.
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My project µRole of Agriculture in the Indian Economy¶ also has research interest in the subject
of investment or capital formation in recent years.
It will be an attempt to:
uc estimate and examine the trends in capital formation, private and public, and its
composition in Indian agriculture,
uc to establish the link between public and private capital formation in agriculture and assess
their relative importance in agriculture growth,
uc to identify and estimate the factors influencing public as well as private capital formation
in agriculture
The statistical measure to be used will primarily be multiple regression and the same as well as
others will be applied identically as done in the study µCapital Formation in Indian Agriculture :
Issues and Concerns¶ by Brijesh Purohit and V Ratna Reddy and µPublic Investment in Indian
Agriculture Trends and Determinants¶ by B D Dhawan and S S Yadav.
The study will be based on secondary data. The various official publications comprise the data
source. At the all-India level, the information will be collected from various publications of
C.S.O.
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Note: References will be furnished in full in the final report