Agricultural Sector and Marketing Reforms – eNAM, Model APMC Act, Eco Survey Reco, etc.

Agriculture finance in India


From UPSC perspective, the following things are important :

Prelims level: AOI

Mains level: Paper 3- India's low AOI


While the overall budgetary allocation towards the agricultural sector has marginally increased by 4.4% in the Union Budget 2022-23, the rate of increase is lower than the current inflation rate of 5.5%-6%.

Agricultural Finance in India – A brief history

Phase 1 (1951-69):

  • Thrust on developing primary sector since 1st FYP in 1951.
  • National Credit Council in 1968 emphasized that commercial banks must increase financing to small scale industries and agriculture
  • Nationalization of banks in 1969 put thrust on the opening of rural/semi-urban bank branches

Phase 2 (1970-1990)

  • The decade of 1970s marked the entry of commercial banks into agricultural credit with the Lead Bank Scheme and regulatory prescription of Priority Sector Lending (PSL).
  • Regional Rural Bank Act, 1976 enacted to specifically provide banking and credit facilities for agriculture and
    other rural sectors.
  • National Bank for Agriculture and Rural Development (NABARD) was established in 1982 to promote agricultural and rural development, particularly by financing SHGs and MFIs.
  • RBI introduced in 1989 service area approach (SAA) & Annual Credit Plan (ACP) system to increase outreach
    to rural areas.

Phase 3 (1991-onwards)

  • Implementation of Narasimham Committee Report of 1991 to increase the operational efficiency of banks.
  • 1st major nationwide farm loan waiver in 1990.
  • Establishment of the Rural Infrastructure Development Fund (RIDF) with NABARD mainly meant for funding rural infrastructure projects.
  • NABARD started a pilot project SHG-Bank Linkage Programme in 1992.

Mechanisms of Agriculture Credit in India

  • Priority Sector Lending: PSL was introduced to ensure that vulnerable sections of the society get access to credit and that there is an adequate flow of credit to employment-intensive sectors like agriculture and MSME.
  • Interest Subvention Scheme (ISS) was launched for short-term crop loans in 2006-07. 2% interest subvention is given to farmers, which is reimbursed to banks (through RBI and NABARD). Additionally, a 3% prompt repayment incentive (PRI) is provided for good credit discipline.
  • Kisan Credit Card (KCC) Scheme, introduced in 1998, aimed at providing adequate and timely credit with flexible and simplified procedures for agriculture-related and also consumption requirements of farmer households.
  • Self Help Group- Bank Linkage Programme (SHG-BLP) aimed at harnessing the flexibility of an informal system with the strength and affordability of a formal system. The SHG-BLP model accepted informal groups as clients of banks – both deposit and credit linkage & allowed collateral-free lending to groups.
  • Joint Liability Groups (JLG) Scheme was initiated by NABARD in 2006 to enhance credit flow to share croppers/tenant farmers who do not have land rights.

Issues with India’s low spending in agriculture

  • The UN Food and Agriculture Organization (FAO) report for 2001 to 2019 shows that, globally, India is among the top 10 countries in terms of government spending in agriculture, constituting a share of around 7.3% of its total government expenditure.
  • However, India lags behind several low-income countries such as Malawi (18%), Mali (12.4%), Bhutan (12%), Nepal (8%), as well as upper-middle-income countries such as Guyana (10.3%) and China (9.6%).

Low budgetary allocation

a) Low allocation for important schemes

  • Drastic slashing of funds towards the allocation towards important schemes like Market Intervention Scheme and Price Support Scheme (MIS-PSS)- ₹1,500 crores (62% less than the previous allocation of ₹3,959.61 crores in the revised estimates (RE) of FY 2021-22).
  • Similarly, the Pradhan Mantri Annadata Aay SanraksHan Abhiyan (PM-AASHA) was allocated just ₹1 crore for the year as against an expenditure of ₹400 crores in 2021-22.

b) Low Capital Investment

  • Allocation for the promotion of rural development was 5.59% in the previous budget which has been further reduced to 5.23% for the present financial year

Other issues

a) Institutional vis-à-vis Non-Institutional Agricultural Credit: Traditionally, rural agrarian credit needs were met primarily through money-lenders, which led to large-scale indebtedness.

  • According to National All India Rural Financial Inclusion Survey (NAFIS 2015), the share of non-institutional credit still persists at around 28%.
  • Unavailability of credit for consumption purposes and to tenant farmers, sharecroppers, and landless labourers, who are not able to offer collateral security, further pushes them towards non-institutional sources.

b) Skewed agency share in institutional credit: Dependency on scheduled commercial banks in agricultural & allied credit is still large (~78-80% of the credit). Though co-operative institutions (~15%) and Regional Rural Banks (~5%) play a significant role in extending agricultural credit, their share is highly skewed geographically.
c) Regional Disparity in Agricultural Credit: States falling under central, eastern, and northeastern regions are getting very low agri-credit as % of their agri-GDP.
d) Poor deployment of agricultural credit to allied sectors (~6-7%) despite a share of 38-42% in the agricultural output indicates neglect of allied sectors by the banks.
e) Issues with Priority Sector Lending (PSL): Though at the aggregate level banks have been able to achieve the overall PSL target of 40%, so far they have failed to achieve the agriculture target of 18% at the system-wide level. Moreover, ~60% of Small & Marginal Farmers (SMFs) have not been covered by SCBs.
f) Interest Subvention Scheme (ISS) on short-term loans have skewed the distribution of agricultural credit in favor of production credit against crop-related investment credit, which is important for the long-term sustainability of the agriculture sector.
g) Kisan Credit Card: As per Agricultural Census 2015-16, only 45% of the farmers possess operative KCCs. Agricultural households are unable to get credit for their consumption requirements and hence, they are compelled to go-to money lenders.
h) Diversion of agriculture loans for non-agriculture purposes:
In many states like Tamil Nadu, Andhra Pradesh, Kerala, etc, agri-credit is far higher than their agri-GDP, indicating the possibility of diversion of
credit for non-agricultural purposes. Diversion accentuates the problem of debt overhang, fuels a high level of indebtedness, and deteriorates credit culture in long run.

Way forward

a) Improve the Reach of Institutional Credit:

  • Complete the digitization process and update land records in a time-bound manner.
  • Reforming of land leasing framework by adopting policies like the Model Land Leasing Act proposed by NITI Aayog, which intends to make all lease agreements formal and enhance access to formal credit.
  • Establish a federal institution in agriculture on the lines of GST Council to enable consultation with states during formulation & implementation of reforms.

b) Addressing regional disparity: PSL guidelines should be revisited for improving the credit off-take in central, eastern, and northeastern states.
c) Increasing Credit Flow to Allied Activities: Set separate targets for loans towards allied activities under Ground Level Credit (GLC) & Priority Sector Lending (PSL) guidelines.
d) Enhancing the sub-target of SMFs under PSL- Considering that the total operated area held by SMFs would amount to 51.85% by the year 2020-21, increase the share of agricultural credit under PSL to SMFs to 10% from the current 8%.
e) Agricultural Loans against Gold as Collateral: Banks should develop an MIS to flag agricultural loans sanctioned against gold as collateral in CBS in order to segregate such loans for effective monitoring of end-use of funds.
f) Utilizing Farmer Producer Organisations (FPOs): NABARD should promote women-oriented FPOs by identifying successful women SHGs. Government should expand the scope of its credit guarantee program through Small Farmers’ Agribusiness Consortium (SFAC).
g) Database for Indian Agriculture sector: Develop a centralized database capturing details related to crops cultivated, cropping pattern, output, sown/irrigated area, the health of the soil, natural calamity, etc. Besides, farmer-wise details like identity, land records, loan availed, subsidy given, insurance and details of crop cultivated, etc. should also be captured.
h) Convergence of National Highways development, Rural infrastructure, rural facilities, and increase the number of markets as recommended by the National Commission on Farmers. 


Consider the question “What explains India’s low score on Agriculture Orientation Index which is the ratio between government spending towards the agricultural sector and the sector’s contribution to GDP? Suggest the way forward.”


The intensification in government spending towards the agricultural sector is the key to attaining the sustainable development goals of higher agricultural growth and farm income.


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Neatly explained with good structuring


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