Wednesday, March 28, 2012

ROLE OF CREDIT IN AGRICULTURE


The adoption of modern technology, which is capital intensive, has commercialized agricultural production in India. Besides, the farmer’s income is seasonal while his working expenses are spread over time. In addition, farmer’s inadequate savings require the uses of more credit to meet the increasing capital requirements. Furthermore, credit is a unique resource, since it provides the opportunity to use additional inputs and capital items now and to pay for them from future earnings. Yet, credit needs vary under traditional and changing agriculture. In fact, credit has both “static” and “dynamic” characters.

At traditional and subsistence farming, i.e. with no marketed surplus and only some financial income is earned from time to time, no credit can be given due to lack of repaying capacity.

Afterwards, when a small quantum of marketed surplus becomes available, only a very small. Amount of credit “can and should” be provided. Here emphasis falls on the word “should” since credit has still a completely “static” character, i.e., it does not enhance production rather represents only a burden on the farmer’s budget. The situation, however, becomes more complicated when the farmer resorts to distress sales, which does not necessarily imply the existence of a considerable food surplus. This sale itself has the character of disguised credit transaction. Nevertheless, in such cases the farmer may also apply for institutional credit. Here, credit is a “double dead weight”. Firstly, the interest which the farmer has to pay to his institutional credit agencies has not been counter-balanced by any increase in his income. Secondly, there may be a considerable difference between the sale price and purchase price of food grains, i.e., first marketed and purchased or borrowed afterwards. This kind of “static” anticipatory credit persisted specially during the pre-technological period. In all such cases, the quantum of credit supply should, therefore, be as small as possible since it enhances the agricultural production at a slow rate. However, the small farmer can be saved from the clutches of money-lenders who charges exorbitantly higher interest rate and makes him permanently indebted. Credit is, therefore, useful as long as it is administered in appropriate doses. The modernization of agriculture which shifts upward the production function in India would only save the farmer from such forced borrowings.

Agricultural credit begins to show clearly a “dynamic” character when the farmer adopts improved agricultural production technology. Consequently, the institutional credit is utilized for increasing agricultural production and proceeds are available for both production and consumption purposes rather than the payment of old debt. However, under such circumstances it is essential that institutional credit is not only supplied in due time but also adequately. The provision of insufficient credit induces the farmer to borrow from the money-lenders to supplement his institutional loans. As soon as he is dealt by the money lender, he becomes indebted to such an extent that money-lender hardly leaves enough farm produce for him to maintain the family. Several studies in India have revealed that the interaction effects of capital and technology are substantially high in all the categories of farms. It signifies the fact that credit can play its “dynamic” role only in conjunction with the agricultural production technology, i.e. in presence of credit absorption capacity.

1 comment:

  1. Excellent analysis regarding Agri credit and farmer's behavior towards use of credit

    ReplyDelete