Agriculture

Scraping farm subsidy RBI committee bats direct transfer

RBI committee on financial inclusion has suggested that the government should transfer cash directly to beneficiaries instead of giving subsidies and should replace interest subvention on agriculture loans with affordable universal crop insurance scheme
Scraping farm subsidy RBI committee bats direct transfer

A committee, set up by Reserve Bank of India on financial inclusion has suggested that the government should transfer cash directly to beneficiaries instead of giving subsidies, and should replace interest subvention on agriculture loans with affordable universal crop insurance scheme.

The committee on medium-term path on financial inclusion, headed by RBI executive director Deepak Mohanty, also recommended linking credit accounts with unique identification number, or Aadhaar number, and share information with credit information companies to enhance stability of the credit system and improve access.

The committee was set up in mid-July after Prime Minister Narendra Modi told RBI in its 80th anniversary that a roadmap should be built to include India’s unbanked population in the financial fold.

The group opined that the most efficient way for an effective financial inclusion is direct cash transfer.

Presently, the government gives interest rate subvention of two percent for short-term crop loans of up to Rs 3 lakh. Another three percent subvention for prompt repayment lowers the effective cost further. Payments towards such subvention have increased rapidly over time, the report said. From less than Rs 2,500 crore in subvention in 2006, government’s subvention in 2016 is projected to be above Rs 12,500 crore.

Besides, actual cultivators are not always the landowners and hence such subventions do not even reach them. The land owners, being the recipients of the subventions, turn into moneylenders. The panel said that agricultural credit must flow to the actual cultivator for which tamper-proof digitisation of land records was a must.

“The scheme is for short-term crop loans, and as a result it discriminates against long-term loans and thereby, does not incentivise long-term capital formation in agriculture, which is essential to boost productivity,” the panel said, adding any subsidised credit increases the chance of misuse.

India mainly subsidises fertiliser, irrigation, power and credit, but the subsidy leads to vast leakages. For example, the fertiliser subsidy, which increased from Rs 18,500 crore in 2005-06 to an estimated Rs 73,000 crore in 2015-16 is not financially sustainable in the long run.

“Subsidising farmers by reducing the price of inputs could ultimately be regressive, i.e., rich households could benefit more from the subsidisation than their poorer counterparts,” and panel said and hence, recommended that the government should simply transfer cash to farmers equivalent to the fertiliser subsidy. Similarly, cash transfer can be tried to address problems in the irrigation sector and instead of charging ‘abnormally low electricity tariffs’ for agricultural use, equivalent cash can be transferred into beneficiaries’ accounts.

According to the Agriculture Census (2010-11), 83 percent of India’s 138 million farming holdings are small and marginal farmers who hold less than five hectares of lands. These groups are heavily dependent on private moneylenders, even as those with 10 hectares of land holding have banking facility to tap.  

The committee recommended that a mandatory crop insurance scheme covering all crops should be introduced starting with small and marginal farmers with a monetary ceiling of Rs 2 lakh. Farmers will have to pay a nominal premium to get this insurance and the balance could come from government subsidy.

“The government can phase out the agricultural loan interest subvention scheme and plough back that allocation into the crop insurance subsidy,” the panel said.

Heavy use of technology, like satellite images for crop mapping and assess damage, could make the insurance scheme more efficient. Satellite imagery can be used for ‘crop mapping’ and to assess damage. 

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