K C Chakrabarty: Agricultural productivity and credit - issues and way forward
Address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at The
National Seminar on Productivity in Indian Agriculture, College of Agricultural Banking (CAB),
Pune, 2 September 2011.
* * *
Assistance provided by Shri Thanzason Sonna and Smt Pallavi Chavan in preparation of this address is gratefully
acknowledged.
1. Prof. M. S. Swaminathan, Shri A. S. Bhattacharya, CMD, Bank of Maharashtra, Ms
Kamala Rajan, Principal, CAB, Shri R. L. Sharma, Vice-Principal, CAB and other members of
faculty, distinguished panelists, participants, ladies and gentlemen! It is a pleasure to be here
this morning for the "National Seminar on Productivity in Indian Agriculture" organized by
CAB, Pune.
2. In the Indian context, the policy of self-sufficiency in food which led to Green
Revolution had served the country well. The country currently has sufficient stocks of wheat
and rice which are above buffer stock norms and food security reserve requirements.
However, in the medium to long term, concern over food security is likely to become more
intense. This is because land is scarce and its supply is limited. Further, sustained
dependence on food imports is not an option that is viable in Indian context. Therefore, food
safety net for the present and future population requires enhanced agricultural production
and productivity. This is already attracting the attention of the Reserve Bank of India. Thus,
this Seminar organized by CAB, Pune is very topical and the theme has great bearing on the
future growth of India.
3. And who could be a better person than Prof. M. S. Swaminathan to set the tone for
this Seminar. It is indeed a matter of great privilege that Prof. M. S. Swaminathan is in our
midst today. Known as the "Father of the Green Revolution in India" for his leadership and
success in introducing and further developing high-yielding varieties of wheat in India, his
vision is to rid the world of hunger and poverty. Prof. Swaminathan is an advocate of moving
India to sustainable development, especially using environmentally sustainable agriculture,
sustainable food security and the preservation of biodiversity, which he calls an "evergreen
revolution". He has worked worldwide in collaboration with colleagues and students on a
wide range of problems in basic and applied plant breeding, agricultural research and
development and the conservation of natural resources. It was only in the fitness of things
that he delivered the inaugural address today. Sir, we are overwhelmed by your insightful
address and I am sure all of us have immensely benefited listening to his valuable views on a
subject which is not only very dear to you but also so vital for the country's economic growth.
4. I also note that the Seminar includes several eminent speakers with vast experience
on the subject. There are sessions on agricultural productivity, role of research and
technology in improving agricultural productivity, linkages between productivity and farm
income, incentivizing productivity enhancing investments, relation between credit growth and
productivity growth and mitigation of risks in agriculture. In my address today, coming as do
from the RBI, I would broadly focus on major trends/issues in agricultural productivity and
credit, and the role of agricultural credit in improving agricultural productivity. I would also
touch upon some of the steps that can yield results in the short-term.
Importance of agriculture
5. As you are aware, the recent Indian growth story has been service-led. Services
sector has completely replaced agriculture, which was traditionally the largest contributor to
India's GDP. However, the fact that agriculture has the smallest share in GDP of only about
14 per cent today from a high of more than 50 per cent , does not belittle its importance for
the Indian economy. This is because first, as we all know, agriculture remains the largest
employer having a share of around 60 per cent. Secondly, it holds the key to creation of
demand in other sectors and remains by far an important indirect contributor to India's GDP
growth. The agriculture sector needs to grow at least by 4 per cent for the economy to grow
at 9 per cent. Thus, though having a small share, the fluctuations in agricultural production
can have large and significant impact on overall GDP growth. Thirdly, since food is an
important component in basket of commodities used for measuring consumer price indices, it
is necessary that food prices are maintained at reasonable levels to ensure food security,
especially for the deprived sections of our society. In fact, food security is emerging as an
important policy concern, and the role of agriculture in ensuring equitable access to food has
added a new perspective for policy makers.
Trends in agricultural productivity
6. I would like to discuss certain trends in agricultural productivity in India. As is
wellknown, the year 1968 marked the beginning of a turning point in Indian agriculture. The
country was dependent on agricultural imports for almost two decades after independence.
Production of rice and wheat grew at 28.0 per cent and 23.6 per cent, respectively, during
1967-68 while their yields during the same year grew at 19.6 per cent and 24.4 percent,
respectively. This was the first time that such high growth in production and yield of both rice
and wheat was witnessed in the country. These levels of growth remain one of the highest
achieved so far. The development of high-yielding variety (HYV) of seeds in mid 1960s and
the subsequent use of the fertiliser-pesticides-irrigation package, better seeds, improved
irrigation and education of farmers led to quantum jumps in the productivity. Consequently,
production of wheat, rice and foodgrains grew at an average rate of 21.9 per cent, 10.3 per
cent and 10.9 per cent, respectively, during the subsequent years 1967-1970. This may be
attributed to significant rise in yield of wheat, rice and foodgrains which grew at an average
rate of 11.2 per cent, 7.9 per cent and 8.1 per cent, respectively, during the same years.
These growth rates have also been unprecedented. High growth in production and yield
continued during the subsequent decades of 1970s and 1980s. Production of wheat, rice and
foodgrains during 1970s-1980s grew at an average rate of 5.1 per cent, 4.0 per cent and
3.3 per cent, respectively. The yields of wheat, rice and foodgrains grew at an average rate
of 3.1 per cent for wheat and rice, and 2.9 per cent for foodgrains, respectively, during the
same period. These rates of growth in production and yield were much higher than the
average annual rate of growth of population of 2.2 per cent during the same period. This
enabled the country to achieve self-sufficiency in terms of wheat and rice (Table 1).
7. The productivity of Indian agriculture, however, witnessed a fatigue with the average
growth rate of production of wheat, rice and foodgrains during 1990-2010 coming down to
2.6 per cent, 1.4 per cent and 1.6 per cent, respectively. This was due to stagnancy in yield
of wheat, rice and foodgrains which grew at an average rate of 1.7 per cent, 1.2 per cent and
1.6 per cent, respectively, during the same period. Moreover, the average growth rate of
foodgrains production at 1.6 per cent during 1990-2010 trailed the average population
growth of 1.9 per cent (Table 1). As a result, the per capita net availability of foodgrains per
day came down from 510.1 grams in 1991 to 444.0 grams in 2009. The corresponding
figures for pulses were 41.6 grams and 37.0 grams, respectively.
8. Low yield per unit area across major crops has become a regular feature of Indian
agriculture in recent years. This can be attributed to structural weaknesses of the agriculture
sector reflected in low level of public investment, exhaustion of the yield potential of new high
yielding varieties of wheat and rice, unbalanced fertiliser use, low seed replacement rate, an
inadequate incentive system and post harvest value addition. Some of the other reasons that
can be attributed to the low agricultural productivity in our country are (i) Lack of irrigation
facilities in major part of the cultivated land; (ii) Small and fragmented land holding with the
cultivators; (iii) Lack of timely availability of quality seeds, fertilizers for providing all major
and minor nutrients for the crops and insecticides in many parts of the country; (iv) Lesser
availability of photo period as compared to countries like those in Mediterranean sea areas.
9. Productivity of Indian agriculture is low as compared to the productivity at the global
level. Estimates of yield of rice as of April 2011 in India was 3.2 tonnes per hectare as
against 7.5 tonnes per hectare in the United States, 6.7 tonnes per hectare in China and an
average of 4.3 tonnes per hectare for the world (Chart 1). Similar contrast in yields have also
been observed in case of wheat and coarse cereals though yield gaps as regard oilseeds
were lesser i.e., 1.0 tonne per hectare, 2.7 tonnes per hectare and 2.1 tonnes per hectare for
India, United States and China respectively. Even the most productive States in the country
fall short of world standards in terms of yields of major crops.
10. During 2010-11, Punjab with the highest yield in rice produced 3.8 tonnes per
hectare as against the world average of 4.3 tonnes per hectare. Yield of oilseeds in Tamil
Nadu, the highest in India, at 2.1 tonnes per hectare was lower than 2.7 tonnes per hectare
in China and United States. However, yield of wheat at 4.5 tonnes per hectare in Punjab
during 2010-11 is higher than that of the United States and the world average though it was
marginally lower than 4.7 tonnes per hectare in China. Further, there exists a wide variation
in productivity of these crops across States/regions in India (Charts 2-4). There is an urgent
need to address inter-regional, inter-State and intra-State disparities in agricultural
productivity.

11. There is also a need to emphasize on increasing productivity of millets such as
Jowar and Bajra. The productivity of other crops such as oilseeds, pulses, and horticulture
also needs to be improved. Shortfall between demand and supply of key food items like milk
and eggs is likely to occur which needs to be addressed. According to National Dairy
Development Board (NDDB), India would need 180 million tonnes of milk by 2021-22. This
would effectively mean that the current addition to annual production of milk which is
2.5 million tonnes at present must be doubled to 5 million tonnes per year to achieve self
sufficiency in 2021-22. Likewise, National Institute of Nutrition has recommended 11 kg of
meat and 180 eggs per capita consumption for our country, whereas the per capita
availability of meat is just 1.6 kg and per capita availability of eggs is 42. As per the Eleventh
Five Year Plan, demand-supply gap during 2009-10 with respect to oilseeds is estimated to
be around 13.4 per cent in oilseeds, 18.7 per cent in pulses and 2.0 per cent in foodgrains.
Estimates by the Indian Council of Agricultural Research (ICAR) show that in order to meet
demand requirements of food items like oilseeds, fish, eggs and fruits by 2020-21,
production have to grow at an annual rate of 6.0 per cent, 3.5 per cent, 3.4 per cent and
2.9 per cent, respectively, for the period of 15 years i.e., during 2006-07 to 2020-21
(Table 2). Therefore, a meaningful and comprehensive analysis of productivity of all
segments of agriculture is needed for effective policy intervention. Also, creation of
opportunities and efforts to shift workforce engaged in agriculture sector to agro-industries
and agro-services to increase employment would have to be made.
12. In recent years, yields of crops have remained low and there has been a
progressive hike in minimum support price (MSP) for wheat and rice. This may be seen as a
continuation of policy tilt in favour of price intervention as against non-price intervention
followed in the post-reform years. This has ensured sufficient and steady procurement of
foodgrains which can cater to meet the demand of the public distribution system (PDS) and
various welfare schemes of the Government. However, for various reasons, off-take of
foodgrains has not kept pace with procurement.
13. Skewed incentives as regard rice and wheat have affected land use and cropping
pattern with public procurement remaining concentrated in a few States. Currently in most
States, the MSP is a purely a notional price as far as farmers are concerned. Farmers know
that they have an option to sell their produce at MSP but they have no access to Government
granaries or take-in windows.
14. Lower off-take, despite adoption of the Decentralized Procurement Scheme (DCP)
under which foodgrains are procured and distributed by the State itself , combined with
higher procurement has resulted in large stocks of foodgrains, which are often higher than
the required buffer norms and food security reserves. In the past three decades, except for a
few years, aggregate procurement of rice and wheat has been higher than their off-take.
15. To sum up, Indian agricultural situation today, therefore, is a mix of declining yields,
low productivity, inter and intra-state and regional disparities, skewed incentives and
inappropriate food stock management in the backdrop of increasing concerns on food
security and food price volatility. In this context, a frequent refrain is that credit is not
available. While empirically this is not the case, let me ask you all whether credit is an
important component of raising productivity? If yes, then do we know the direction of credit?
Can credit alone solve all the problems of declining or low agricultural productivity and how,
after all, do we improve productivity? I would like to focus on major trends in agricultural
credit and its role in improving productivity.
Trends in agricultural finance
16. In India, where the formal financial system is predominantly bank-oriented, banks
play an important role in financing the needs of agricultural sector. With the aim of facilitating
the timely and adequate credit flow to agriculture, the sector has been targeted as a part of
the priority sector lending programme introduced after nationalisation of banks in 1969.
Domestic commercial banks have been directed to allocate 18 per cent of net bank credit to
agriculture and allied activities. The directed credit programme has clearly resulted in a
significant increase in the amount of credit allocated to agriculture over the years (Table 3).
Moreover, the Government of India also directed commercial banks, RRBs and cooperatives
to double the flow of agricultural credit over a span of three years since 2004. Further, the
scheme of interest rate subvention was introduced by the since 2006.
17. Growth in agricultural credit and number of accounts, which was on a declining trend
during 1990-2000 has picked up in early 2000s and continued till 2006-07, but is again
showing a declining trend in the recent years (Chart 5). During the period of high growth in
agricultural credit, the share of indirect credit was on an increase (Chart 6) but has remained
stagnant in subsequent years. Moreover, the share of small and marginal farmers in total
credit, which was at about 27 per cent each, stayed unchanged at that level between
2004-05 and 2006-07, even as agricultural credit growth was on a rise (Chart 7). This clearly
meant that the benefits of doubling of agricultural credit to small and marginal farmers have
been relatively less.

18. It has also been observed from available data that the share of total agricultural
credit supplied through rural branches has seen a decline from 55.5 per cent in 1990 to
38.5 per cent in 2010 (Table 4). The contribution of urban and metropolitan branches to
agricultural credit has increased from 14.9 per cent to 33.7 per cent during this period,
indicating that credit disbursement is mainly through non-rural branches. The available data
raises questions about the segments to which the credit is actually flowing and whether it is
reaching the intended beneficiaries.
Table 4:
Non-availability of relevant MIS
19. The analysis of flow of agricultural credit and its impact on productivity is
constrained by the absence of granular data other than total, direct and indirect credit.
Further, there is limited data on agricultural credit to various crops, horticulture and allied
activities even on a consolidated basis. The dearth in the availability of granular and
disaggregated data greatly hampers policy making. For instance, banking system at present
does not capture data on finance to agriculture sector other than total credit, direct and
indirect credit. There is also great confusion among banks in the figures relating to credit
disbursed and credit outstanding. The number of beneficiary accounts is not under focus.
There is no systematic segmentation of data among Scheduled Commercial Banks/ Regional
Rural Banks/State Co-operative Banks/District Central Cooperative Banks.
Recommendations for improving agricultural productivity
20. This brings me to my last section on what are the challenges in improving
productivity and in what way these challenges can be overcome.
21. The major challenge in this regard is that nearly 80 per cent of the land holdings in
India are below 2 hectares in size. Unless factor productivity is increased, small farm
agriculture will become un-remunerative. However, the smaller the farm, the greater is the
need for marketable surplus in order to get cash income. Therefore, improving small farm
productivity, as a single development strategy, can make the greatest contribution to the
elimination of hunger and poverty. The wide differential in productivity across States and the
fact that agriculture is a State subject itself poses a challenge. Slow rate of infrastructural
development hampers physical connectivity, marketing and information dissemination across
all regions uniformly which acts as a bottleneck in improving productivity.
22. Hence, the following suggestions/approach may be deliberated by the participants of
this Seminar:

Credit is no doubt an important element in agricultural production but is surely not
the only indispensable input. In fact, there is a need for credit to be explicitly linked
to other supportive inputs and activities in farming that eventually facilitate value
creation and higher incomes for farmers. More importantly, a number of other allied
activities and related services such as technology, soil conservation, irrigation,
storage and marketing etc, can be supported by credit with great advantage. These
measures would also help in reducing costs of production.

Pricing of credit needs to be market-based to ensure effective flow of credit to all
sections of the agricultural community. Emphasis has to shift from subsidized credit
to timely and adequate credit at reasonable cost especially where credit delivery
system is very weak and complex.

It is also important to carefully monitor the usage of credit right from the input to the
output stage so as to ensure proper utilization. Monitoring of credit should not only
be limited to crops but also to related activities that are funded by financial
institutions like NABARD.

Productivity improvement through efficient deployment of investible resources in
agriculture is the key to ensuring food security. It is possible to improve productivity
through a multi- pronged approach without increasing the intensity of resource use
by leveraging on improved management of agricultural practices or agronomy, soil
conservation, extension services, storage and marketing facilities, technology
transfer, updating farmers of latest technology and farming techniques in
a framework of public-private partnership by engaging farmers, NGOs and industrial
(FICCI, CII etc. ) and other stake holding institutions and associations. This
framework can be modeled in the shape of a multi- purpose cooperative structure
which should aim at project based approach to ensure focus on the ultimate
objective of improving productivity and welfare of both farmers and consumers.

The delivery of credit by co-operative sector need to be improved and NABARD
should play a key role in converging credit services with other requirements that
support agriculture and allied activities including updating the farmers which help in
facilitating completion of production cycles and ultimate value creation. Although,
schemes such as Kisan Credit Cards have helped in improving credit linkage to
farmers but we need to urgently look into ways to increase the supply of agricultural
credit especially to small and marginal farmers.

Strengthening of cooperatives not only from the credit delivery angle but also from
the skill enhancement and knowledge angle - technology thus needs to be brought
in through an integrated and cluster approach. In my opinion, Primary Agricultural
Co-operative Societies (PACS) are the best vehicle for rural credit disbursement.
So, linking of co-operative sector with commercial banks may be an option where
the co-operative banks are weak.

Credit needs can be fulfilled in regions where creditworthy producers can get credit
due to the advantage of pre-existing infrastructural facilities such as functioning
supply chains and marketing networks. After enhancing credit flow to these regions,
the next logical step would be to build on this experience to take credit to all other
regions.

There is a need to strengthen micro-insurance, particularly for small farmers to
adequately weather vagaries of nature, which affect these farmers more adversely.
An institutional mechanism to take care of marketing and storage risk is needed.

As emphasized earlier, lack of granular data on credit availed or demanded as a
constraint for effective policy making. In this respect the need for a holistic MIS can
be hardly overemphasized. The MIS of banks, RBI, NABARD, financial institutions,
State and Central Governments has to be revamped.

In the recent years, we have witnessed declining yields which is worrisome from the
standpoint of achieving food security. It is, therefore, necessary to promote modern
scale neutral agricultural technologies with greater emphasis on bank credit to
agriculture as a tool to improve productivity.

Finally, there should be renewed emphasis on indigenous research and
development on technology for dry-land farming, rainwater harvesting and
sustainable water use, high yielding seed varieties with pest and drought resistant
traits. In this regard, the role of agriculture research institutions and related support
agencies cannot be lost sight of.
Conclusion
23. This is not an exhaustive list. However, I feel that instead of lamenting that
productivity has been low, we must look at the past to the Green Revolution in the 1960s to
draw confidence that productivity can be improved. We need to find ways to surmount the
existing constraints and step up productivity using finance as a tool. The Green Revolution
paved the way for food security in India. No major technological breakthrough has emerged
since then, and with the need for higher production growing, a second green revolution is
inevitable. In fact, to borrow a term coined by Prof Swaminathan, we need an evergreen
revolution. However, to cater to the food security and food safety net, India needs a higher
production along with enhanced productivity in cereals, pulses, oilseeds, vegetables, poultry,
meat, fish and milk. I am sure the Seminar would be very useful in generating new ways and
means to do so. To achieve this goal, India needs to invest more in agriculture and allied
sectors. I wish the deliberations of the Seminar a success and hope that an actionable plan
would emerge out of it and the participants would take it upon themselves to implement it in
their respective organizations so that regional and inter and intra-State disparities can be
narrowed down and we can effectively contribute to increasing agricultural productivity in our
country.