Swaminathan J: Financing for sustainable agriculture
Keynote address by Mr Swaminathan J, Deputy Governor of the Reserve Bank of India,
at the International Research Conference, hosted by the College of Agricultural Banking
(CAB), Pune, 11 September 2024.
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Distinguished Guests, Dr R. C. Agrawal, Deputy Director General, Indian Council for
Agricultural Research; Dr Sunil Gorantiwar, former Director of Research, Agricultural
University, Rahuri; Principal, CAB; senior officials from Financial and Academic
Institutions; colleagues from RBI; ladies and gentlemen. A very good morning to all of
you.
It gives me immense pleasure to address you all today at this international research
conference on the topical subject "Sustainable Financing for Food Security and Farm
Income - Opportunities, Challenges, and the Way Forward". It is even more fulfilling
when it is being done as part of the celebrations of the 90th year of RBI's inception.
Climate change and sustainability are two pressing issues that have captured global
attention. In recent years, we have witnessed a surge in extreme weather events,
including severe droughts, cloudbursts, flooding, landslides, receding coastlines, and
the alarming melting of Arctic ice and Himalayan glaciers. Wildfires have become more
frequent and intense. Tragically, the most vulnerable communities-those who have
perhaps contributed the least to climate change-are bearing the brunt of its devastating
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impacts .
In this context, sustainable agriculture emerges as a crucial solution. Sustainable
agriculture refers to farming practices that meet today's food needs while preserving
resources for future generations. This means adopting methods that protect the
environment, reduce reliance on chemical inputs, use water and land efficiently, and
ensure social and economic equity for farmers.
Looking ahead, achieving agricultural sustainability will be a key priority for all
economies where agriculture is a major sector. This will involve transforming
conventional farming practices into technology-driven systems, enhancing agricultural
commodities' processing and preservation techniques, contributing to value addition at
the farm level. We also need to align crop production systems with climate-smart
agriculture. And there is a need to ensure adequate and timely finance as well to
sustain all of these.
Challenges faced by Indian Agricultural Sector
In the Indian context, agriculture is not just an economic activity; it is the foundation of
our nation's food security and livelihood. The sector employs a significant portion of our
population. Yet, despite its critical importance, Indian agriculture continues to face
several structural challenges. Let me briefly elaborate on some of these challenges that
are holding back the sector from realising its full potential.
Low Productivity
Firstly, India's agricultural productivity remains low compared to many crop-producing
nations. This low yield-measured as the quantity of crop produced per unit of land-is
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due to various factors, including a lower rate of seed replacement , inefficient fertiliser
use and limited adoption of advanced technologies.
Predominance of Small and Marginal Landholdings
Secondly, the overwhelming dominance of small and marginal landholdings creates its
own set of challenges. This fragmented land structure negatively impacts the viability of
farming. With lower marketable surplus and holding capacity, small farmers often have
limited bargaining power, face higher transaction costs, and struggle with the marketing
of their produce. These factors further hinder their ability to invest in new technologies
or improve productivity.
Dependence on monsoons/ rainfall
Thirdly, India's heavy reliance on rainfed agriculture is another critical challenge.
Approximately 45 per cent of the country's agricultural land remains dependent on
rainfall, making farmers highly vulnerable to the unpredictable nature of the monsoon.
This over-reliance on rainfed farming leads to inconsistent agricultural output, exposing
farmers to significant risks. The challenge lies in optimising the use of existing water
resources while expanding irrigation coverage. Ensuring more predictable and stable
agricultural output will require a focus on efficient water management, irrigation
infrastructure, and climate-resilient farming practices.
Inadequate Agricultural Processing capacity
Fourthly, limited processing infrastructure poses a significant barrier to agricultural
growth. Without adequate processing and preservation facilities, a large portion of
agricultural produce is lost post-harvest, reducing the overall supply and farmer
incomes. Low value addition means farmers often receive lower prices for their raw
produce, missing out on the potential earnings from processed goods. Additionally, the
lack of processing capabilities hampers access to both domestic and international
markets, limiting export opportunities and reducing the competitiveness of Indian
agricultural products globally.
Low level of Farm mechanisation
Fifthly, the low level of farm mechanisation poses a significant obstacle to enhancing
agricultural productivity in India. Labour shortages during peak farming seasons,
combined with demand for higher wages, further aggravate this issue, making it difficult
for farmers to maintain optimal output. Additionally, Indian agriculture faces a
demographic challenge, with the average age of farmers now at 50.1 years,
underscoring the need to attract younger generations to the sector. Modern farming
techniques and increased mechanisation will not only boost productivity but also play a
pivotal role in empowering women. By alleviating the physical demands of traditional
farming, mechanisation and agro-processing can open up new opportunities for women,
enabling them to make a greater impact on agricultural productivity and the broader
rural economy.
Agriculture and Climate Change
When we consider the various sectors of the Indian economy, the agricultural sector
stands out as one bearing the heaviest burden of climate change. Today, agriculture is
at the confluence of three of the greatest challenges of the 21st century - sustaining
food and nutrition security, adaptation and mitigation of climate change and sustainable
use of critical resources such as water, energy and land.
Climate change is already reshaping traditional agricultural practices and even affecting
our food choices today. For instance, South Korea's famous kimchi, traditionally made
with napa cabbage grown in cooler mountainous regions, is under threat as rising
temperatures spoil the cabbage crop. Similarly, French winemakers are concerned
about the future of Merlot due to increasing heat, and lobster populations off the US
east coast are shifting to cooler waters, impacting local industries. The impact is
farreaching highlighting the urgency for farming and the food industry to adopt greener
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practices and contribute to climate mitigation .
Financing for Sustainable Agriculture
While sustainable agricultural practices are necessary, they are often more expensive
to implement than conventional methods. Sustainable practices like organic farming,
climate-smart technologies, and modern irrigation systems may seem costly upfront,
but they offer long-term benefits by improving productivity, resilience, and
environmental stewardship. Without accessible and affordable financing options, the
much-needed shift to sustainable farming practices will remain a distant dream for
many.
Many farmers, especially those in rural or underserved regions, struggle with economic,
institutional, and social constraints that limit their access. Therefore, sustainable finance
should not only promote environmentally friendly practices but also ensure that financial
resources are available to the farmers who need them most, providing equitable access
to tools, technology, and knowledge.
Institutional credit to agriculture reached an all-time high of 25.10 lakh crore during
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2023-24 , reflecting the importance of financing in driving agricultural growth.
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Approximately 7.4 crore active Kisan Credit Cards have emerged as vital tools for
providing timely and flexible credit, especially for short-term needs. However,
addressing regional disparities in access to credit remains critical. If we can ensure that
all farmers, irrespective of their location, have access to adequate and timely financing,
we will be better positioned to address the challenges of sustainability and resilience in
agriculture.
Traditional lending practices have certain limitations in catering to the needs of the
agricultural sector. Agriculture is inherently seasonal, and returns are often delayed or
reduced. Innovative financial solutions are necessary- ones that are flexible and tailored
to the specific needs of farmers. This coupled with crop insurance products that cover
weather-related risks can help mitigate the uncertainties farmers face. Additionally,
blended finance models-where public funds are used to leverage private
investmentscan be instrumental in providing the necessary capital for sustainable transitions. This
would not only mobilise resources from multiple sources but also distribute the risks and
returns more equitably.
In this context, I would like to highlight five solutions which could go a long way in
addressing the issue of financing sustainable agriculture.
Role of Collectives
Farmer Producer Organisations or FPOs have emerged as a crucial mechanism for
addressing the specific challenges faced by small and marginal farmers. Their growth
has been significant, with over 24,000 Farmer Producer Companies (FPCs) formed by
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March 31, 2023 .
These organisations are instrumental in scaling up the adoption of sustainable farming
technologies developed by research institutions. By aggregating farmers, FPOs
enhance their bargaining power as well as improve their access to technology and
increase market opportunities for their output.
To support financing to these organisations, RBI regulations provide that loans to FPOs
engaged in agriculture and allied activities, up to an aggregate limit of 2 crore per entity,
qualify as priority sector lending. If FPOs engage in farming with assured marketing of
their produce at predetermined prices, loans of up to 5 crore qualify as PSL.
Value Chain Financing
The value chain financing model integrates various stakeholders-farmers, aggregators,
traders, processors, and financial institutions-into a coordinated system that improves
efficiency across the agricultural process. With changing consumer preferences
towards branded, well-packed, safe, and healthy food, there is a need for increased
focus on structured agriculture value chains and their financing. For financial
institutions, access to various participants in the value chain offers additional business
opportunities.
Warehouse Financing
Agricultural price volatility is a recurring challenge in India, often forcing farmers to sell
their produce at lower prices during peak harvest due to immediate financial needs.
Warehouse receipt financing allows farmers to store their produce in warehouses,
delaying the sale until market prices become favourable. During this waiting period,
farmers can access much-needed funds through commodity financing from banks. This
form of financing helps stabilise the prices of agricultural commodities, helps farmers in
managing marketing risks, while providing banks with diverse financing opportunities.
However, for this form of business to flourish, the country needs more robust third-party
warehousing agencies.
Financing Technology Adoption
Technology adoption in agriculture offers immense potential to boost productivity and
sustainability. Expanding irrigation infrastructure, promoting micro-irrigation systems,
and encouraging farm mechanisation can significantly increase farm income and
improve efficiency. Currently, the area under micro-irrigation in India is just 12.54 million
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hectares, i.e. about 9 per cent of the net sown area , indicating a large scope for
expansion. Convergence with Centrally Sponsored Schemes such as "Per Drop More
Crop" can increase the flow of institutional credit for installing micro-irrigation systems.
Protected cultivation, which can increase crop yields by 5 to 8 times per unit area, also
offers substantial benefits such as saving 50 per cent on water and 25 per cent on
fertilisers and pesticides. With only about 3 lakh hectares under protected cultivation,
there is a significant opportunity to expand this practice using modern techniques which
enable year-round cultivation of high-value crops, irrespective of climatic conditions.
Capital formation through convergence with Government Schemes
The Indian government is driving capital formation in agriculture by promoting
investments through capital subsidy schemes and interest subventions. The 1 lakh
crore Agri-Infrastructure Fund supports institutional credit in alignment with schemes
like PM-KUSUM for solar pumps, the Sub-Mission on Agricultural Mechanisation
(SMAM), and the Mission for Integrated Development of Horticulture (MIDH). Other
initiatives, such as the Agricultural Marketing Infrastructure (AMI) and programs like
Pradhan Mantri Formalisation of Micro Food Processing Enterprises Scheme (PMFME),
Animal Husbandry Infrastructure Development Fund (AHIDF), and Pradhan Mantri
Matsya Sampada Yojana, further enhance agricultural growth. Converging institutional
credit with these schemes will help scale up modern technologies and strengthen the
agricultural ecosystem.
Leveraging technology
Technology and data-driven insights can enhance financing models. Financial
institutions must leverage technology to improve access to credit and mitigate risks.
Collaboration with digital platforms that track crop yields, weather patterns, and soil
health can provide real-time data that financial institutions can use to assess risk more
accurately. These platforms can also help farmers make more informed decisions and
boost productivity while reducing their environmental impact.
The RBI has taken several initiatives to facilitate digital public infrastructure and make
institutional arrangements apart from policy initiatives aimed at promoting innovation
while ensuring safety and stability. Last year, RBI announced the Public Tech Platform
initiative through the RBI Innovation Hub, aiming to provide frictionless credit by
enabling the seamless flow of digital information to lenders. This open, plug-and-play
digital platform, now renamed Unified Lending Interface allows financial sector players
to connect effortlessly. Recently, NABARD collaborated with RBI Innovation Hub to
integrate the e-KCC loan origination system into the platform, significantly reducing the
turnaround time for agricultural loans from weeks to minutes.
Way forward
In conclusion, the challenges are significant, but so are the opportunities. Going
forward, two critical issues must be addressed: promoting sustainable agriculture and
ensuring adequate funding for it. Institutional credit has grown significantly, but regional
disparities persist. Value chain financing and warehouse financing offer potential
solutions, while government initiatives like the Agri Infrastructure Fund, PMFME, and
AHIDF are helping drive agricultural growth. A concerted focus on addressing regional
imbalances, enhancing credit access, and integrating value chain financing is crucial for
a more sustainable and resilient future for Indian agriculture.
I hope that this conference will provide a valuable opportunity to the delegates from
academia, researchers, and financial institutions to delve deep into the various issues
facing the Indian Agricultural Sector, analyse it in the backdrop of emerging climate
change challenges and come up with alternate solutions, approaches and policy
suggestions.
With this, I would like to convey my best wishes for fruitful exchanges over the next two
days to explore solutions that can shape the future of sustainable agriculture and its
financing.
Thank you.
1
Climate Change 2023, Synthesis Report, Intergovernmental Panel on Climate
Change (IPCC)
2
Seed Replacement Rate is the percentage of area sown out of total area of crop
planted in the season by using certified/quality seeds other than the farm saved seed.
3
Edit, T. (2024, September 6). Kimchi bites. Times of India Blog. https://timesofindia.
indiatimes.com/blogs/toi-editorials/kimchi-bites/ (last accessed on September 8, 2024)
4
NABARD Annual Report - 2023-24; PP80
5
NABARD Annual Report - 2023-24; PP10
6
NAFPO. 2023. Farmer producer organisations in India: state of sector report. National
Association of Farmer Producer Organisations, New Delhi.
7
Agricultural Statistics at a Glance, 2022